BRUSSELS (Reuters) - EU state aid regulators formally approved on Monday a British plan allowing bailed-out lender Royal Bank of Scotland <RBS.L> to fund about 835 million pounds ($1.1 billion) to boost competition by helping challenger banks.

The British government had reached an agreement in principle with the European Commission on July 26 after RBS failed to sell a business banking unit Williams & Glyn as one of the conditions of its 45-billion-pound rescue.

"The package targets a transfer of a 3 percent market share in the UK small- and medium-sized banking market from RBS to challenger banks," the EU competition enforcer said.

It said the plan involves the setting up of a capability and innovation fund and an incentivized switching scheme.


(Reporting by Foo Yun Chee)