* Heavy agenda of reforms risks overburdening staff, operations
* "Creeping concern" of zero tolerance for risk-taking -chairman
* H1 pretax profit drops 12 pct after fall in revenue
* HSBC set to benefit from higher interest rates
* Shares up 1.2 pct vs 0.6 pct sector rise
(Adds background on reforms, details from results)
LONDON, Aug 4 (Reuters) - Europe's largest bank HSBC warned that regulators' zeal to punish wrongdoing was putting its staff off taking reasonable business risks, as it reported a 12 percent drop in first-half profit.
Chairman Douglas Flint called on regulators to clarify what they expect of bank staff after recent record sanctions for misconduct, including a $9 billion U.S. fine against France's BNP Paribas, had left them fearful of retribution.
"There's a creeping concern that staff are clearly very focused on the penalties for getting things wrong and are building risk-aversion into the way they think," Flint told reporters on Monday. "We've got to avoid getting to the state where there's a zero risk tolerance."
Flint said too-harsh rules could hurt lending in areas such as commercial banking, where products can be complicated. Industry sources have warned of unintended consequences from the regulatory clampdown, including the threat that lending will be cut to people or businesses in poorer countries.
Since the action against BNP Paribas for breaching U.S. sanctions, international banks have become hyper vigilant about following new rules, including recent moves by Washington and Brussels to freeze some Russian state-controlled firms out of western capital markets.
HSBC was fined $1.9 billion in 2012 for breaching U.S. sanctions on money laundering in Mexico, since when it has pulled out of business areas and countries, including Panama, to cut the risk of future problems.
The bank said it is spending about $800 million a year more than in 2011 on compliance across its operations in 74 countries as politicians and regulators demand tighter compliance and better standards across the industry.
Excessive risk-taking has been blamed as contributing to banks' problems and regulators are forcing banks to hold more capital and liquidity to prevent a repeat of the financial crisis of 2008 and 2009.
HSBC and its rivals still face the risk of further fines and legal costs from investigations including a global probe into alleged manipulation in foreign exchange markets. The bank said any fines or penalties from the FX probe could be significant.
Under new UK rules, the bank also has to separate its UK retail operations from its riskier investment banking arm and it warned on Monday of a substantial one-off cost to do that.
Chief Executive Stuart Gulliver said the split would cost hundreds of millions of pounds each year.
Lost revenue from closing businesses and a slowdown in investment banking pushed HBSC to a 12 percent drop in pretax profit to $12.3 billion in the six months through June, just below an average forecast of $12.5 billion from 15 analysts polled by the company.
Revenue dropped 9 percent to $31.2 billion, partly due to some businesses having been sold.
Profits in Latin America, where HSBC is focusing on Brazil, Argentina and Mexico, fell by a fifth to $374 million and profits in its investment bank fell 12 percent to $5 billion, mainly due to a fall in foreign exchange trading revenue.
Replacing lost revenue is one of the biggest challenges for HSBC. Gulliver said the figure should pick up strongly about six months after interest rates rise in major markets. HSBC expects UK rates to start rising in the fourth quarter of this year and in the first half of 2015 in the United States.
HSBC is more geared to the benefit of higher interest rates than rivals because of its big deposit base, liquid balance sheet and relatively conservative risk appetite, analysts say.
A big rise in rates could add billions of dollars to its top line and HSBC estimates a 25 basis point rise across a range of rates would lift annual income by almost $1 billion a year.
The prospect of such a boost helped lift HSBC's shares 1.2 percent by 1400 GMT, outperforming a 0.6 percent sector rise.
"I think resilience is the word. Gulliver is signaling he thinks rates will move this year, U.S. rates first half of next year ... that's the one thing that will get this stock moving," said analyst Mike Trippitt at brokerage Numis.
Gulliver is in the second phase of a turnaround plan that began in 2011, aiming to make the bank simpler, more efficient and able to deliver better returns for shareholders. He has sold or shut 74 businesses in three years and shed 41,000 jobs.
Gulliver is struggling to get return on equity, a key measure of profitability, to his target of between 12 and 15 percent. RoE was 10.7 percent in the first half, down from 12 percent a year ago.
But he said HSBC was delivering better quality revenue and the bank's core capital - a measure of financial strength and its defence against future losses - rose to 11.2 percent at the end of June from 10.8 percent at the end of last year, well above the regulatory minimum of 7 percent.
(Writing by Carmel Crimmins; Editing by Erica Billingham and David Holmes)