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(Reuters) – Barclays chief executive Bob Diamond suddenly quit on Tuesday over an interest rate-rigging scandal that threatens to drag in a dozen more major lenders but suggested the Bank of England had encouraged his bank to manipulate the figures.

“The external pressure placed on Barclays has reached a level that risks damaging the franchise – I cannot let that happen,” said Diamond, 60. The terms of his severance were not announced, though Sky News said the bank would ask Diamond to forfeit almost 20 million pounds ($30 million) in bonuses.

Politicians and newspapers have zeroed in on the scandal – which revealed macho e-mails of bankers congratulating each other with offers of champagne for helping to fiddle figures – as an example of a rampant culture of wrongdoing in an industry that stayed afloat with huge taxpayer bailouts.

Barclays released an internal 2008 memo from Diamond, then head of its investment bank, suggesting that the deputy governor of the Bank of England, Paul Tucker, had given Barclays implicit encouragement to massage the interest figures lower during the peak of the financial crisis in order to present a better picture of the bank’s financial position.

According to the memo, Tucker told Diamond he had received calls from senior government officials. “It did not always need to be the case that we appeared as high as we have recently,” Diamond said he had been told.

The Bank of England declined to comment, but analyst Ian Gordon at Investec said: “Based on first inspection it does seem to suggest that Barclays have received a message from the Bank of England which provided, to put it mildly, significant encouragement.

“So they’re maybe trying to share the blame but with justification. It raises a whole bunch of questions, and they’re very serious and they’re for the Bank of England to answer.”

However, Alistair Darling, Britain’s finance minister at the time, said he found it hard to believe that the central bank would have made such a suggestion: “What Bob Diamond or Barclays appear to be saying is that the Bank (of England) told them to do this,” said Darling, whose Labour party is now in opposition.

“I would find it absolutely astonishing that the Bank would ever make such a suggestion and equally I can think of no circumstances that anyone, certainly in the department which I was responsible for – the Treasury – would ever suggest wrongdoing like this,” he told Channel Four television.

Noting how the central bank provided cash to help ease the upward pressure on commercial banks’ borrowing costs, he said: “Policy was changed in order to get that rate down.

“However it would have been reprehensible and wholly unforgivable if anyone had attempted to try and manipulate this rate by simply putting in false figures.”

SUDDEN REVERSAL

Diamond’s resignation was a sudden reversal, hours after the American said it was down to him to clear up the mess at Britain’s third-largest bank, fined nearly half a billion dollars for its part in manipulating the benchmark interest rate used to price everything from derivative instruments to home loans.

There was speculation in banking circles over whether Diamond, one of Europe’s highest paid bankers and once labeled by a Labour minister as the “unacceptable face” of banking, jumped or was pushed.

Prime Minister David Cameron had announced a parliamentary inquiry after calling for Diamond to take responsibility for the scandal, and the Financial Services Authority regulator had also brought pressure to bear on the board.

The government is now considering the introduction of criminal sanctions for serious misconduct in the management of a bank, the finance ministry said on Tuesday.

FSA Chairman Adair Turner said on Tuesday he had had private conversations with Barclays since Friday morning about the need for “cultural change” at the bank.

“We communicated to the board those were the sort of issues they needed to think about, but it was for them to decide whether they could achieve that degree of change … under the current leadership,” he said.

Diamond sent a long letter to staff on Monday making clear his resolve to continue. But he and the board decided he should quit later that day after Cameron and finance minister George Osborne announced the parliamentary inquiry.

“A FIRST STEP”

Diamond’s resignation was “a first step towards that change of culture, that new age of responsibility we need to see”, Osborne told BBC radio.

“The chairman of Barclays phoned me last night to let me know that this was the decision of the board and of Mr. Diamond, and I think Mr. Diamond made the right decision,” Osborne said.

Diamond will appear before the parliamentary inquiry on Wednesday, where his memo on the attitude of the Bank of England towards the manipulation of the interest rate at the time is likely to take centre stage. His evidence will have legal immunity.

Outgoing chairman Marcus Agius will lead the search for a new CEO, despite having announced his own imminent departure a day earlier. Newly appointed Chief Operating Officer Jerry del Missier, long a Diamond lieutenant, also left.

The reversal was a shock within the 322-year-old bank, which in recent years has boasted an aggressive culture cultivated by Diamond, first as head of investment banking and then as CEO. One Barclays banker, asking not to be identified without permission to speak publicly, said staff were disappointed.

“Everyone here has been bandying around names, but it’s going to be hard to find someone of the same quality as Bob and John (Varley, his predecessor). I guess it would be hard to appoint someone from the investment banking side now.”

Barclays has admitted it submitted falsely low estimates of its borrowing costs to calculate interbank rates from late 2007 to May 2009, a time when Diamond ran investment banking. Large banks’ estimates of the interest rates they pay each other are used to calculate the London Interbank Offered Rate, or Libor, basis for trillions of dollars in contracts around the globe.

By manipulating the figures, banks could give flattering impressions of their financial strength. Barclays says it submitted low figures because it thought rivals were doing the same and higher rates would have made it seem to be in trouble.

The Libor figures submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of the British Bankers’ Association.

Opposition Labour Party leader Ed Miliband, who has said he wants to see criminal prosecutions of Barclays bankers, welcomed Diamond’s resignation but said a parliamentary inquiry was not enough and demanded an independent probe led by a judge.

“This is about the culture and practices of the entire banking system, which is why we need an independent, open, judge-led, public inquiry,” he said.

The government said a judge-led inquiry would take too long to be of use shaping new laws to tighten rules. Cameron, elected in 2010, has repeatedly made the point that Miliband’s Labour was in power at the time of the wrongdoing.

NAMES IN THE FRAME

Antony Jenkins, currently chief executive of Barclays retail and business banking, is the most likely internal candidate to replace Diamond, said Oriel Securities analyst Mike Trippitt. However, the firm may choose to look outside for a new leader to turn the page on the scandal.

“Promoting an existing manager might not look like it is doing enough to tackle problems with aspects of the bank’s culture which the LIBOR scandal has exposed,” one top 25 Barclays investor said, asking not to be identified.

Other names in the frame include former JPMorgan investment banking co-head Bill Winters and Naguib Kheraj, the ex-Barclays finance director and former CEO of JPMorgan Cazenove.

“I struggle to see many worthy candidates to replace him,” said a top 40 investor.

Barclays shares, which rose on the news of the departure of Agius on Monday, were down 1.1 percent late on Tuesday at 166.5 pence, while the European banking stocks index was flat. The shares were down more than 15 percent from Thursday’s open.

Barclays was fined $453 million by U.S. and British authorities, the first bank to settle in an investigation that is looking at more than a dozen others, including Citigroup, UBS and RBS.

(Additional reporting by Sinead Cruise, Chris Vellacott, Victoria Howley, Sophie Sassard, Douwe Miedema, Hugh Jones and Matt Falloon; Writing by Will Waterman; Editing by Peter Graff andGiles Elgood)