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UPDATE 1-Britain's 'bad bank' expects to repay Bradford & Bingley's FSCS loans by March

(Corrects headline, paragraph 1 to show that UKAR plans to settle B&B's FSCS loans by March, not that it plans to sell entire portfolio by March. Adds paragraphs 2, 6, 7 to clarify.)

By Noor Zainab Hussain

July 4 (Reuters) - Britain's 'bad bank', which is charged with winding down the assets of two failed lenders, said it expects to repay a significant part of the loans Bradford & Bingley received when it was bailed out by March next year.

UK Asset Resolution Authority (UKAR) says that it expects to sell another tranche of Bradford & Bingley's mortgage portfolio, enabling it to pay the outstanding 4.8 billion pounds ($6.20 billion) it owes to Britain's Financial Services Compensation Scheme (FSCS), by March next year.

UKAR sold the first tranche of Bradford and Bingley's 15.65 billion pound mortgage portfolio in March 2017 to insurer Prudential and buyout firm Blackstone for 11.8 billion pounds.

"We are working on the next phase of the programme which we look to launch in the next months with a full repayment (of FSCS loan) expected by March 2018," said Ian Hares, chief executive of UKAR.

Hares did not specify how much of Bradford & Bingley's assets UKAR planned to sell to repay the FSCS loan, which covers compensation given to bank customers.

Including the FSCS loan and settlement of the Prudential and Blackstone sale, the UK government is still owed 13.6 billion pounds for the Bradford & Bingley bailout.

Sky News reported last week that Blackstone was now looking to buy as much as 6 billion pounds of Bradford & Bingley mortgage loans.

Hares said that a sale is in the works, but a formal process had not been launched yet.

"I am not in a position to confirm any names because the process has not been formally launched yet. But, there are a number of interested parties," he said.

"Blackstone bought the last one so it wouldn't be a surprise if they are in there again."

Sky also named OneSavings Bank, Och-Ziff, and hedge fund TPG as interested parties.

UKAR, a state-run loan firm that does not take on new business, said on Tuesday it repaid 3.3 billion pounds ($4.27 billion) to the government last year.

UKAR has now returned 23.7 billion pounds to the government, almost half the total value it owed when it was created in October 2010.

UKAR is winding down the loans of Northern Rock and Bradford & Bingley, which were nationalized in the run-up to the 2008 financial crisis.

UKAR's underlying profit before tax fell by almost 33 percent to 706 million pounds in the year ended March, reflecting in part a 9 billion pound reduction in its loan book. ($1 = 0.7740 pounds) (Reporting by Noor Zainab Hussain in Bengaluru; Editing by Keith Weir/Rachel Armstrong)