UPDATE 3-Britain's RBS announces first dividend in a decade

* RBS announces first dividend in 10 years

* Reports pre-tax profits of $2.34 billion

* Profits well above expectations

* Core capital ratio at 16.1 percent (Adds investor reaction, updates shares)

LONDON, Aug 3 (Reuters) - Britain's Royal Bank of Scotland will pay its first dividend since it nearly collapsed and took a state bailout in 2008, paving the way for the government to further reduce its stake in the lender.

Taxpayer-owned RBS said it would pay an interim dividend of 2 pence per share, subject to the finalization of a $4.9 billion settlement with the U.S. Department of Justice (DOJ) over the bank's sale of mortgage-backed securities in the run up to the financial crisis.

The dividend marks a milestone in RBS's rocky road to rehabilitation over the last decade. Together with hefty cuts made to its investment bank and international business, it could shift its profile with investors from a risky bet into a safe, predictable value stock.

"We're pleased but not totally surprised about the dividend news, it just show they have really cleaned the bank up and it's one of the best capitalized banks in Europe now," said Alasdair McKinnon, manager at The Scottish Investment Trust which owns RBS shares.

Until its agreement in May, the looming settlement had blocked RBS's restoration of dividends, excluding a whole class of income-focused investors from buying its stock.

FURTHER RETURNS?

Announcing the bank's half-year results, RBS CEO Ross McEwan said the bank was now looking to return further excess capital to shareholders, including via special dividends or share buy backs, from 2019.

"Our intention has always been to get capital back into the hands of shareholders," he said on a conference call with reporters, adding that the bank would want to look at the potential impact of Brexit before making any major payouts.

The British government still holds a 62.4 percent stake in RBS, acquired with a 45.5 billion pound ($59.1 billion) state bailout during the financial crisis.

The interim dividend payment would return 150 million pounds to government coffers, according to a Reuters calculation.

It also expands the market for future government share sales by enabling a broader array of investors to look at buying the bank's shares.

RBS stock however has not performed well recently, dropping around 7.5 percent between the first government share sale in June and Friday's results announcement.

The bank's shares had risen 2.4 percent to 256 pence at 0915 GMT on Friday.

BREXIT CONCERNS

Bank of England Governor Mark Carney said on Friday RBS's results were another sign the country is moving beyond the financial crisis.

However McEwan signaled there could be new trouble ahead for the British economy. He struck a cautious tone on Brexit, saying that there was still uncertainty around the arrangements between Britain and the European Union and that the economy was running at its slowest rate in years.

RBS is making "an absolute assumption" that there will be no 'passporting' of financial services as part of any deal between the two sides, he added.

Such a deal would have allowed British lenders to continue selling their services in Europe without making major changes.

The bank reported a pre-tax profit of 1.8 billion pounds for the first half of 2018, even after taking a 1 billion pound provision to cover its settlement with the DOJ.

RBS will also not close any more branches beyond those in its Williams & Glyn network until 2020, McEwan said, following repeated criticism by lawmakers about the pace at which the bank and its peers are axing outlets as customers go online.

That reputational risk is among several problems that could cloud RBS's otherwise bright outlook.

"Just because RBS is in a much better place than it was a decade ago doesn't mean it's all smooth sailing from here," said Fiona Cincotta, senior market analyst at City Index.

She pointed to tough competition in products like mortgages, which had shrunk the bank's net interest margin - an indicator of bank profitability - and said time will tell whether years of hefty cuts have left RBS less able to compete with its peers. ($1 = 0.7679 pounds)

(editing by Silvia Aloisi and Keith Weir)