By Huw Jones

LONDON (Reuters) - Britain's markets watchdog has called on banks to assess how different trading relations with the European Union would hit the City of London's role as a global financial center.

Financial services account for 12 percent of Britain's economy, employ over 2.2 million people, and pay 66 billion pounds ($88.50 billion) in taxes.

Companies in the sector rely on a "passport" to offer services across the 28-nation bloc, but with Britain voting last week to withdraw from the EU, they may not have full passporting rights in future.

Britain won't begin formal exit negotiations with Brussels for months and any agreement on new trade relations could take years to finalize.

John Griffith-Jones, chairman of the Financial Conduct Authority, said banks and other financial sector firms must resist the "chicken and egg" syndrome of waiting to see what trading terms emerge before assessing risks to the UK sector.

"I suggest there is a need for an industry led 'collective' strategy view to emerge," Griffith-Jones told lobby group TheCityUK's annual conference.

The industry must be ready to tell the government what various degrees of access to the EU single market would mean for London in terms of costs and market share, he said.

"It is important for the UK that, at the appropriate moment, you are able to inform the government where your major opportunities and risks lie, along with other industries, as it forms its plans for the negotiation of our exit," he said.

John McFarlane, chairman of TheCityUK and of Barclays <BARC.L> bank, told reporters at the conference that "things are not going to stay the same" for London's financial center.

"We are going to end up with less. How much less is a function of the negotiations," McFarlane said.

Access to the EU's single market was the top priority, but little would happen until there was clarity on trading terms in about two years' time, he said.

Firms won't rush to break costly property leases until they have seen what sort of trading terms emerge. But firms without a base elsewhere in the EU would need a contingency plan "in their back pocket" in case Britain does not get the trading terms it wants, he added.

(Reporting by Huw Jones; Editing by Keith Weir)