* UK calls for probe of "restrictive" bank lending covenants
* Auditing watchdog FRC says government has listened
* UK Office of Fair Trading says to decide soon on probe
By Huw Jones
LONDON, March 23 (Reuters) - Britain's government has asked its antitrust regulators to probe whether banks help to entrench the dominance of the "Big Four" auditing firms through restrictive lending agreements with companies.
British Finance Minister George Osborne's budget on Wednesday included a call to the Office of Fair Trading (OFT) to probe whether bank covenants lock out smaller auditors.
The Financial Reporting Council (FRC) had expressed concern to lawmakers last year that clauses in some covenants force companies to use only one of the "Big Four" accounting firms -- PwC, Deloitte, KPMG and Ernst & Young.
The FRC said on Wednesday the government had listened to its concerns and hoped the OFT would push ahead with a probe.
The auditing sector is already under the gun and being watched for its role in giving banks a clean bill of health in the run up to the financial crisis.
The upper chamber of Britain's Parliament, the House of Lords, is finalising a report into the current setup in which one of the Big Four checks the books of nearly all the world's top companies.
In Britain they also dominate auditing of mid-sized companies, sparking accusations from smaller auditors they are being locked out by restrictive clauses in lending agreements. A probe appears inevitable as the European Union also looks at ways to inject competition into auditing, fearing mayhem in financial markets if one of the Big Four were to go under -- as happened following the collapse of Arthur Andersen, which formerly helped make up an auditing Big Five.
"We are aware of the recommendation today. We have been keeping the audit market under review since 2002 and we have already made clear we are interested in the area of bank covenants," OFT spokesman Frank Shepherd said.
"We have already undertaken the initial steps into scoping for a potential market study, and that is subject to OFT board approval. The board is likely to make a decision in April," Shepherd said. (Editing by David Holmes)