LONDON (Reuters) - The London Stock Exchange will launch a contract to compete directly with rival InterContinental Exchange to wean markets off Libor by 2021, the British bourse said on Monday.

LSE's CurveGlobal derivatives arm is set to launch its three-month SONIA futures contract in the second quarter of this year. SONIA or Sterling Overnight Index Average, is a benchmark administered by the Bank of England.

Regulators around the world aim to wean over $350 trillion (£25.34 trillion) of derivatives and other financial contracts away from Libor, after a widespread rate-rigging scandal brought the benchmark into disrepute and left submitting banks facing billions of dollars in regulatory fines.

UK regulators have set a 2021 deadline for moving to SONIA in Britain, with central banks elsewhere in the world taking similar action with other "risk free" rates.

Although Libor, or the London Interbank Offered Rate, has been reformed and being administered by a unit of ICE, regulators say it is not being traded enough to be reliable.

A liquid futures contract will help markets meet this transition challenge, said Andy Ross, CurveGlobal's chief executive, said in a statement.

ICE Futures Europe has already launched a one-month futures contract referencing SONIA.

A financial industry official said choosing between ICE or LSE will depend to some extent on where a customer wants to clear and net against other derivatives contracts held in the same clearing house to save on costs.

CurveGlobal said it was offering its contract free of clearing and exchange fees for the remainder of this year.

(Reporting by Huw Jones, editing by Louise Heavens)