LONDON (Reuters) - British insurer Aviva has abandoned a plan to cancel high-yielding preference shares that had been opposed by investors and drawn scrutiny from the country's financial watchdog.

The insurance giant had said earlier this month it was looking at cancelling the shares, which will no longer count as regulatory capital after 2026 under new European rules.

Cancelling the securities, which have a face value of 450 million pounds ($635 million) and were described as being "irredeemable", would save Aviva 38 million pounds a year in coupon payments.

The proposal faced criticism from investors and also attracted the attention of Britain's Financial Conduct Authority (FCA), which earlier this week said it had asked Aviva to explain the legal basis for its plan.

The insurer said on Friday it had now decided to take no action over the shares after consulting with a large number of investors and receiving "strong feedback and criticism".

Preference shares are popular with both institutional and retail investors.

Institutional investors M&G Prudential, Invesco, GAM, Edentree, BlackRock and Legal & General (>> Legal & General), who met with Aviva's chairman on Tuesday to ask him to scrap the plan, said in a statement the change of heart "goes a long way towards addressing our concerns."

But they added the company and other preference share issuers should change their documentation to show "the true irredeemable nature of the instruments."

The preference shares of Aviva's legacy business, General Accident , had surged by 23 percent at 1211 GMT on news of the U-turn, while those for Aviva <35PG.L> were also up 0.5 percent on Friday.

The securities had tumbled in the wake of Aviva's March 8 disclosure that it was considering the future of the stock, as had preference shares of other British financial groups, including those issued by Bristol & West and Santander UK, on worries they could also be cancelled.

"I am very aware that Aviva is in a position of trust with our customers and investors," the insurer's chief executive Mark Wilson said. "To maintain that trust it is critical that we listen to and act on feedback."

He added that not proceeding with the plan "means that preference shareholders can rest secure in their holdings."

Mark Taber, a campaigner for retail investors who met Aviva to discuss its plan earlier this week, described the insurer's decision as an "honourable climbdown".

He said regulators should now act to protect the wider preference share market.

"Aviva has exposed a loophole which has undermined and destabilised the value of a whole asset class of shares on one of the world's leading markets, and things like that shouldn't be happening," Taber said.

Aviva said it could reconsider its stance closer to 2026 and that if it revisited the issue, it would take into account the "fair market value" of the shares at the time.

The insurer added it still planned to use 3 billion pounds of extra cash to cut hybrid debt, buy back ordinary stock, and make small acquisitions.

(Additional reporting by Carolyn Cohn; Editing by Mark Potter)

By Ben Martin