* Barclays, Lloyds and Banco BPM fare worst in test
* UK banks capital tested by risky lending exposure
* BoE says results show UK banks can absorb worst case
* EU banking watchdog publishes results of 48 banks
* None of banks tested below key 5.5 pct capital level (Recasts with more comment, background)
By Huw Jones and Lawrence White
LONDON, Nov 2 (Reuters) - Britain's Barclays and Lloyds were the surprise laggards in a European Union bank health check on Friday, although none of the 48 lenders tested failed a major capital threshold.
The EU's banking watchdog published results on Friday for its toughest "stress test" since 2009, when it began the exercise to identify capital holes and avoid any repeat of the government bailouts triggered by the 2008 financial crisis.
The latest test measured banks' ability to withstand theoretical market shocks like a rise in political uncertainty against a backdrop of plunging economic growth, a disorderly Brexit or a sell-off in government bonds and property.
While there was no pass or fail, banks unable to complete the "adverse" or toughest part of the test without preserving a capital ratio of well above 5.5 percent, could be forced by regulators to raise more capital, sell risky assets or curb their dividends.
None of the banks tested in the health check by the European Banking Authority dropped below the 5.5 percent threshold, but Barclays and Lloyds unexpectedly came in among the three worst performers.
Barclays ended up with a core capital ratio of 6.37 percent and Lloyds with 6.8 percent in the adverse scenario, both marked down due to their exposure to riskier credit, the EBA said.
British banks have chased higher-risk business to try and boost returns, as rock-bottom interest rates and competition from upstart rivals fuelled a boom in consumer lending.
This has prompted repeated warnings from the Bank of England for them to take a more prudent approach. The International monetary Fund said in September that consumer credit in Britain was rising much faster than income and this could require "additional increases in bank-specific capital buffers".
But Britain's central bank - which will publish the results of its own stress tests of British banks on Dec. 5 - said on Friday the UK lenders tested by EBA showed they could absorb the impact of the worst scenario.
The EBA test contained potential shocks like Britain crashing out of the EU next March without a deal.
Barclays said in response to the results that it remained comfortable with a target core capital ratio of around 13 percent. Lloyds said its capital levels remained strong and it continued to expect to generate 2 percentage points of additional capital for the full year.
Some Italian banks also fared poorly.
Banco BPM's capital result was 6.67 percent, while UBI's was 7.46 percent. Monte dei Paschi di Siena , which failed the previous round of stress tests in 2016 and has since been bailed out by the state, was not included in the health check this time.
Italian banks had been expected to be among the worst performers due to a sharp fall in the value of government bonds since an anti-establishment, eurosceptic government came to power in June.
The country's banks hold some 375 billion euros ($427 billion) of domestic government bonds, and the rise in Italy's bond yields is eating into their capital and pushing their borrowing costs higher.
Germany's largest lender Deutsche Bank had a ratio of 8.1 percent, the second-worst German score ahead of public-sector bank NordLB but up from 7.8 percent when it was last put under the microscope two years ago.
The outcome of the tests showed there was, on average, enough capital in the EU banking system, but challenges like bad loans and lacklustre earnings remain, said Mario Quagliariello, the EBA's director of economic analysis.
"Profitability remains quite a problem for many banks in Europe," he told Reuters.
Risks from credit was a common theme across the EU.
The EBA said that across the 48 banks tested, the adverse scenario dented the core equity capital ratio by 395 basis points when all new and planned capital rules were applied, higher than in the last test in 2016 due to credit losses.
Europe's banks still lag U.S. counterparts in profitability, quality of loans and cost discipline and the region's banking index has lost more than 20 percent this year.
The European Central Bank, the banking supervisor for eurozone lenders, separately tested a further 60 smaller banks. Some of these are struggling, but the results of their health check are not public. ($1 = 0.8777 euros)
Reporting by Huw Jones and Lawrence White; Writing by Alexander Smith; Editing by Jane Merriman and Silvia Aloisi