* Job cuts include planned Citizens sale, UK branch sales
* Investment bank may be folded into corporate arm
* Government has pressed for investment bank retreat
* RBS shares up 1.5 percent
LONDON, Feb 21 (Reuters) - Royal Bank of Scotland is to shrink its investment banking and international operations in a revamp in which the group could shed up to a quarter of its 120,000 workforce, sources familiar with the matter said.
The part-nationalised bank has given in to demands from politicians that it focuses on lending to British households and businesses and maintains only a downsized investment banking business to service corporate clients, one source said.
RBS, which is 81-percent owned by the British government, could reduce its headcount by up to 30,000 as part of the reorganisation, according to sources familiar with the matter. But that figure includes previously announced plans to sell its U.S. retail business Citizens, which accounts for 18,300 jobs, and a UK retail business, Williams & Glyn, which employs 4,500.
RBS was rescued by a 45.5 billion pound ($75.80 billion)government bailout during the 2008 financial crisis. Since then, the future of its investment bank and Citizens has been a source of friction between RBS's management and Britain's finance ministry.
Finance Minister George Osborne wants RBS to be more like state-backed rival Lloyds Banking Group, which has minimal investment banking operations and concentrates on domestic lending. Lloyds is expected to return fully to private ownership in the next 12 months while RBS is three to five years away.
Former RBS CEO Stephen Hester clashed with politicians over their desire to see RBS's investment bank scaled back and this contributed to his departure last year. Ross McEwan, who replaced him, will unveil the outcome of a strategic review of the business alongside the bank's full-year results next Thursday.
Numis analyst Mike Trippitt said the plans were a positive development subject to restructuring costs and the impact on the bank's capital position.
"It has been clear for some time that the government has wanted RBS to retrench to a UK focused retail and commercial bank," he said.
RBS said last November it would create an internal "bad bank" to fence off its riskiest assets, part of measures to repair its strained relationship with the government and prepare the bank for privatisation.
Analysts at Citi said on Friday RBS had yet to provide a credible business plan on the future direction and strategy of the remaining "good bank".
"In the near-term we expect it will be extremely difficult for new CEO McEwan to turnaround the profitability of the bank," they said in a research note.
One source familiar with the matter said RBS's remaining investment banking activities could be incorporated into its corporate business. RBS is also considering the future of its U.S. and Asian investment banking businesses.
Ratings agency Moody's last week placed RBS's credit ratings on review for downgrade, citing concerns over the part-nationalised lender's capital strength.
Shares in RBS were up 1.5 percent at 0935 GMT.