The deal was the last action Lloyds needed to take to complete its exit from the Irish market, following its closure of its retail banking operation there in 2010.

Lloyds is left only with around 4 billion pounds worth of additional Irish mortgages that it will allow to expire over time.

Lloyds will now be able to focus on tackling an increasing threat to its dominant position in the British markets from new entrants eager to cut prices to win business.

Of the assets sold on Friday, 300 million pounds worth are impaired -- meaning borrowers are struggling to pay them. They generated a pretax loss of around 40 million pounds last year, Lloyds said in a statement.

A year to the day after its return to private ownership following the British government's last sale of its stake in Lloyds, Britain's biggest lender faces a battle to maintain its grip on the mortgage market.

UNDER PRESSURE

Lloyds shares have fallen 7.6 percent in its first year free from government ownership after a bailout. That makes them the worst-performing stock among Britain's four biggest banks with rivals RBS and HSBC climbing an average of 10 percent in the same period.

Investors fear that Lloyds as the biggest mortgage lender, with a market share of 20 percent, has most to fear from a low interest rate environment that makes finding profitable lending opportunities for banks difficult.

"We are concerned about the competition from the mortgage market from new entrants. We think Lloyds has the most to lose; it has the biggest share of the market," said a U.S.-based hedge fund manager with about $1.2 billion in assets.

The fund manager is shorting Lloyds shares, meaning he will profit if the stock declines.

The threat to Lloyds' position comes not just from so-called challenger mid-sized banks like Virgin Money, CYBG and Metro Bank, but also from HSBC which has to grow its market share to meet profit goals in its newly separated UK banking unit.

The rules designed after the financial crisis to partition British banks' core domestic deposit and savings franchises from their riskier and more internationally-focused investment banking units, have effectively created 'new' competitors in the market in the form of British-only lenders such as HSBC UK.

"I do think that Lloyds have some challenges. Competition is heating up. It’s not just an issue for Lloyds," said Jerry Del Missier, founding partner and chief investment officer at Copper Street Capital, which has $162 million in assets.

"If you think about what's happening to the UK banking market with ringfencing, you have a number of banks, including challenger banks chasing the same business," he added.

(Additional reporting by Simon Jessop and Emma Rumney; Editing by Susan Fenton and Keith Weir)

By Lawrence White and Maiya Keidan