Lloyds Banking Group , also bailed out by the government and now 43 percent owned by the state, is expected to announce next week it has pulled free of the scheme, sources close to the matter have told Reuters.

The FT newspaper said on Saturday the government would announce its deal with RBS, 70-percent state-owned, together with the Lloyds package, expected on Tuesday.

According to the FT report, RBS has agreed with the Treasury and the European Union regulators that it will no longer pay an upfront fee of up to 17.5 billion pounds to join the so-called Asset Protection Scheme (APS) for five years.

The Times, in a similar report, said RBS would instead have a "pay-as-you-go" arrangement whereby a premium could be paid each year depending on the toxic assets needing to be insured.

In exchange, RBS will absorb the first 60 billion pounds of losses on toxic assets -- three times the amount set in the original deal, the FT said, though that does include 23 billion absorbed since the scheme was announced in March.

A Treasury source, however, told Reuters on Saturday that no decision had been made on the APS, adding it was too soon for details. The source said the Chancellor was expected to take a final decision this weekend, with an announcement due next week.

Any agreement with RBS is also expected to include asset sales, including the bank's insurance arm, with top brands Direct Line and Churchill, and RBS-branded branches in England and Wales, to satisfy EU competition concerns. But -- crucially -- it should avoid the sale of RBS's U.S. arm Citizens.

A government source had told Reuters on Friday that RBS was likely to sell its insurance operations and other assets to help reduce the size of its balance sheet.

It could also sell parts of its investment bank.

That followed a source familiar with the matter earlier in the month who said the bank could sell 312 RBS-branded branches in England and Wales -- which mainly focus on business lending -- to satisfy competition and state aid concerns.

RBS was not immediately available for comment.

(Reporting by Clara Ferreira-Marques)