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UPDATE 4-Directors duel over control of U.S. consumer protection agency

* Mulvaney tells staff to ignore English

* Both signing off as "acting director"

* English meeting with Senate Democrats (Adds English to meet with Schumer, Warren; Barney Frank comment)

WASHINGTON, Nov 27 (Reuters) - Mick Mulvaney brought a sweetener to the Trump administration's takeover of the consumer watchdog agency on Monday, offering doughnuts as he challenged the Obama-era acting appointee in a partisan showdown over how to regulate the U.S. financial system.

President Donald Trump named Mulvaney, the White House budget chief, acting director of the Consumer Financial Protection Bureau (CFPB) on Friday. But Mulvaney, who tried to dismantle the agency when he was a congressman, faced a challenge from Leandra English, who had been named temporary leader of the CFPB by outgoing Director Richard Cordray.

Mulvaney and English both issued statements on Monday morning indicating they were in charge of the 1,600-employee CFPB.

The battle over the small agency will lay bare deep divisions between Republicans and Democrats over how tightly to control a banking industry that taxpayers had to bail out to the tune of $700 billion less than a decade ago.

English sent an email in which she welcomed staff back from the Thanksgiving holiday and signed off as "acting director," according to a source.

But Mulvaney quickly installed himself in Cordray's former office and stood his ground, writing an hour later:

"Please disregard any instructions you receive from Ms. English in her presumed capacity as Acting Director," he said in a staff memo seen by Reuters. "If you receive additional communications from her today ... please inform the General Counsel."

Mulvaney also signed off as "acting director" and invited staff to pop by his fourth-floor office to "grab a donut."

Trump, a Republican, campaigned for president saying Wall Street "gets away with murder," but at the same time promised to defang or abolish the CFPB, the brainchild of progressive U.S. Senator Elizabeth Warren that was championed by President Barack Obama.

Since taking office, Trump has tried to undo a number of his Democratic predecessor's initiatives, most famously the 2010 Affordable Care Act that the Republican-controlled Congress has been unable to repeal and replace.

HARD AT WORK

Mulvaney's communications director tweeted a picture of him hard at work as acting director with the bureaus transition briefing handbook on his desk.

It was not clear if English was in the building. She was due to meet later on Monday with senior Senate Democrats, including Minority Leader Chuck Schumer and Warren, her office said.

As Mulvaney was getting settled in, the source told Reuters, CFPB general counsel Mary McLeod sent a memo to the CFPB's legal division agreeing with the U.S. Justice Department that Trump had the power to appoint Mulvaney as temporary leader of the watchdog.

Late on Sunday, English sued the Trump administration, seeking to block Mulvaney's appointment. The move means a federal court will decide which law applies when filling a temporary leadership vacancy at the relatively new agency.

It was not clear when the U.S. District Court in Washington would rule.

The CFPB conflict began when Cordray, a Democrat appointed by Obama as the agency's first director, formally resigned and named English, his chief of staff, as temporary director.

Hours later, Trump sought to overrule that move by naming Mulvaney acting director until he can get a permanent successor confirmed by the U.S. Senate, a process that could take months.

The CFPB is hated by Republicans, who think it wields too much power and burdens banks and other lenders with unnecessary red tape.

The agency was established in 2011 in the wake of the 2007-2009 financial crisis to protect consumers from predatory and deceptive mortgage and lending practices.

Cordray developed a reputation for drafting aggressive rules curbing products such as payday loans while issuing multimillion-dollar fines against large financial institutions such as Wells Fargo & Co .

If Mulvaney is installed, "then the agency stops functioning," said former U.S. Representative Barney Frank, a sponsor of the 2010 Dodd-Frank Wall Street reform law that created CFPB.

Frank said in an interview that lawmakers deliberately made it hard for the president and Congress to put political pressure on the agency.

As acting director, Mulvaney would have the power to make far-reaching decisions on enforcement and supervision of financial firms.

In a weekend tweet that did not mention specifics, Trump called the agency a "total disaster" that had "devastated" financial institutions. He has pledged to roll back many Obama-era financial regulations.

Mulvaney once described the CFPB as a "sad, sick joke" and tried to get rid of it when he was a Republican congressman.

English alluded to those views in her lawsuit. She has argued that Dodd-Frank stipulated the agency's deputy director would take over on an interim basis when a director departs.

Trump administration officials say the president has the power to appoint an acting director under the 1998 Federal Vacancies Reform Act, and McLeod's Saturday memo agreed.

The drama came as the Senate was preparing to consider a bill that would significantly ease rules on some banks for the first time since the financial crisis.

Moderate Democrats and Republicans have come out in support of the package, aimed primarily at smaller and mid-sized banks, but analysts warned the drama playing out at CFPB could imperil that compromise. The Senate Banking Committee is supposed to take up the bill next week.

(Reporting by Patrick Rucker; Additional reporting by Richard Cowan Pete Schroeder; Writing by Doina Chiacu and Carmel Crimmins; Editing by Bill Trott and Jonathan Oatis)