By Steve Slater and Kate Holton

LONDON, Sept 7 (Reuters) - Change swept through the top ofBritain's banks on Tuesday with Barclays appointing itsinvestment banking supremo Bob Diamond as chief executive andHSBC announcing its chairman is to go into government.

HSBC, Europe's biggest bank, said Stephen Green would stepdown to become trade and investment minister in Britain'scoalition government. A successor was not named.

HSBC said it had started a search for a replacement andexpects to approve one by the end of the year. The bank pridesitself on its succession strategy, but Tuesday's statement wasforced by reports that Green was set to leave.

Green, 62, joined HSBC in 1992 and was appointed chiefexecutive in 2003 before taking up the role of chairman in 2006.Another former banker, Mervyn Davies, was trade minister underthe Labour government which lost power in May, and the newgovernment has had difficulty replacing him.

Barclays, located a stone's throw away from HSBC in London'sCanary Wharf financial district, said Diamond will become chiefexecutive when John Varley steps down at the end of March.

Diamond has been credited with rebuilding its investmentbank since joining 14 years ago, earning headline-making bonusesin the process.

Varley said he wanted to move on when he turned 55, whichhappens the day after his planned departure. The handover to Diamond, who is 59 and missed out on the topjob when Varley took the helm six years ago, comes as nosurprise to industry analysts, who said it could increase itsfocus on its investment banking arm, Barclays Capital, thegroup's main source of profits in recent years.

Although the appointment puts the retail banking business inthe shade, there is unlikely to be any change in strategy awayfrom its universal banking model, the bank and analysts said.

"He's absolutely committed to making Barclays Capital theworld's number one investment bank. The unique selling point forBarclays is that they are a universal bank and they will lendand finance and source funding for your deal, and Bob has beenthe champion of that model," said Simon Maughan, analyst at MFGlobal.

HSBC SUCCESSOR?

Green's departure prompted speculation on who will replacehim.

Chief Executive Michael Geoghegan, who this year moved hisoffice from London to Hong Kong, is a candidate. So too areboard members John Thornton and Simon Robertson.

Geoghegan said in a statement: "For HSBC it is business asusual; I continue to run the company."

Media speculation swirled in May that Green would leave, buthe said at the time he was planning to stay at the helm for atleast another year.

But the bank said on Tuesday Prime Minister David Cameronhad invited Green to join his government. He will not be paidbut will become a Lord.

Barclays' Varley has also been tipped in media reports for agovernment job. But he said on Tuesday he had nothing new linedup and planned to spend more time on his charitable work.

He will remain as a senior advisor on regulatory matters atBarclays until October 2011.

BANK BREAK-UPS?

A UK Independent Commission on Banking is consideringwhether Barclays, HSBC and the other big UK banks should besplit up, to separate their riskier investment bankingbusinesses from retail lending.

If it forces a change after it reports back to the UKgovernment in a year's time, then Diamond could move the bank'sdomicile or move out with the investment bank, analysts said.

Barclays, HSBC and Standard Chartered have all threatened toleave Britain should a break-up be ordered.

Barclays shares closed down 2.7 percent at 314 pence,valuing it at 39 billion pounds, as dealers cited worries thatthe bank will shift its emphasis even further towards investmentbanking. HSBC's shares dipped 0.1 percent to 662.4p.

CHALLENGE

Diamond said there would be no change for strategy atBritain's third biggest bank, which avoided taking taxpayerbailout cash during the financial crisis and has emerged as oneof the relative winners.

"The biggest challenge is around execution, not strategy,"he told Reuters. "We know we have the right strategy andbusiness model and that's incredibly important for the next fiveto 10 years. There was a period leading up to the crisis whenmany bad models were making money, but that's not going to bethe case going forward.

Affable and charismatic, the Concord, Massachusetts-born sonof two teachers has built BarCap into one of the leading banksin debt markets and is attempting to take on Wall Streetpowerhouses such as Goldman Sachs by expanding into equities andadvisory, boosted by the takeover of the U.S. operations ofLehman Brothers two years ago.

Diamond will move back to London after spending most of histime in New York after the Lehman deal. He will become deputyCEO for a handover period from October.

Barclays said it took external help to look at othercandidates. "We did a thorough process and at the end of it Bobwas the standout candidate," Agius said.

Diamond's long-time lieutenants Jerry del Missier and RichRicci will take over as co-chief executives of BarCap fromOctober. Del Missier, who joined BarCap soon after Diamond, willbe based in New York, while Ricci who joined in 1994, will bebased in London. They were already co-chief executives forinvestment and corporate banking.

Part of the reason Diamond moved to New York is said to havebeen because of the intense scrutiny on his pay.

He has not taken a bonus in the last two years, but he waspaid 21 million pounds in 2007 and received 26 million poundslast year for shares from the sale of asset management arm.

As CEO his base salary will rise to 1.35 million pounds,topped up by an annual bonus of up to 3.4 million pounds and anannual long-term share incentive scheme worth 6.8 million in2011. (Additional reporting by Myles Neligan, Karolina Tagaris, KeithWeir and Sudip Kar-Gupta; Editing by Greg Mahlich)