The British government took a 43% stake in Lloyds Banking Group PLC and a 70% stake Royal Bank of Scotland Group PLC last year to avoid their potential collapse. Selling them back to the public, however, will be far more difficult.

“This is not and cannot be a short-term game,” UKFI Chief Executive John Kingman said. Despite media reports, Mr. Kingman said there had been “absolutely no pressure from the government to begin this process early.”

In a document outlining its work, the UKFI said taxpayers could start to recoup some of the tens of billions of pounds they have invested in the banking sector in the coming months. As the economy comes out of the sharp declines of late last year and early 2009, there could be “opportunities for us to sell the government’s shares might emerge” during this “initial recovery,” it said.

However, the UKFI said the bulk of the sales are likely to take place when the economy is in a fuller recovery and bank shares have “performed robustly.” It added that it isn’t currently working on any transactions to reduce the holdings.

British authorities are facing competing pressures over what to do with the bank stakes. On one side, the government has always said it hopes to return the banks to the private sector as soon as possible, and its large budget deficits could tempt it to cash in on the holdings. However, by giving banks a number of years to rebuild, they may maximize the return for the taxpayer and give banks more time to get back on their feet.

In any case, with the UKFI seeing the sales taking several years, Britain’s next government should have the most options still on the table when it enters office. Prime Minister Gordon Brown must hold an election by mid-2010. The opposition Conservative Party currently holds a significant lead in opinion polls.

In its briefing document, the UKFI said it envisions a series of transactions to exit the stakes that could include public share offerings, private placements, exchangeable bonds and private placements.

John Crompton, the UKFI’s head of market investments, said the timing of the sales and the outcome for U.K. taxpayers is “unknowable.”

The UKFI said it will continue to manage the government’s stakes in the banks at arm’s length and on a commercial basis, signaling full nationalization of the banks wouldn’t take place. However, that still gives the UKFI considerable influence over issues like pay and bonuses at the banks it runs.

In its strategy document, the UKFI said that while “unduly strict restrictions” on pay and bonuses would hurt the taxpayer, it expected RBS and Lloyds to be “at the forefront as banks globally rethink their approach” toward pay.

The UKFI has come under fire for supporting a multimillion-pound pay package for RBS Chief Executive Stephen Hester.

The UKFI estimates the value of its investments in Lloyds and RBS at around £60 billion ($97.25 billion) at current prices, a sum that includes nonvoting B shares already issued and expected to be issued as part of a UKFI-backed insurance program against further losses on the banks’ assets. The market value of the UKFI’s ordinary shares in the two banks was around £23.6 billion at June 30, or about £10.9 billion less than the government paid for the holdings when it recapitalized the two banks.

It had previously nationalized mortgage lender Northern Rock, and took over the mortgage book of Bradford & Bingley as part of a break-up of that bank.

Wall Street analysts said Microsoft’s move – a sharp departure from its decades-old model of selling packaged software – will help prevent the company’s ubiquitous Office software from being displaced by cheaper or free rival products delivered over the Internet.

“Making sure people are still using Microsoft products is more important” in the short term than risking revenue, said Piper Jaffray analyst Gene Munster. “They need to keep people using Office.”

On Monday, the world’s largest software maker said it would offer a stripped-down version of its Office suite of products, which includes the Word word-processing and Excel spreadsheet applications, over the Internet for free. The move follows a relaunch of its Internet search engine, now dubbed Bing, and ahead of the October release of the next version of its Windows operating system.

The decision to offer a free online version of Office suggests free software strategies like Google’s have started to bite. The Mountain View, Calif.-based search giant offers a free online software package, known as Google Docs, that has many of the same functions as Office. Google also provides enhanced fee-based tools for corporations.

Sandeep Aggarwal, an analyst with Collins Stewart, estimates that Microsoft gets about $4 billion in revenue from consumer users of Office, customers most likely to use the free Web-based version of the software.

“Google’s initiative is forcing Microsoft to change its business model,” said Aggarwal.

But some observers note that Google’s efforts have simply accelerated an existing push toward Web-based software services. And Stephen Elop, who runs the Microsoft unit that produces Office, argued that making some of its products available for free should help the company expand its overall business customer market.

Investors appeared to like Microsoft’s move, sending shares almost 3.8% higher Monday to close at $23.23. Google shares were also higher, rising 2.4% to $424.30.

The move is the latest twist in the brewing battle between Microsoft and Google, which said last week it was developing an operating system that could challenge Microsoft’s Windows software.

Some observers say it is only a matter of time before Google starts serving up ads to people who use its office services, much like it has begun to do on its email service. Others question whether advertising will prove to be an effective way to monetize free online software.

Munster argues that online subscriptions provide a predictable and reliable annual revenue stream that could end up being more lucrative for Microsoft than selling software upgrades every few years.

Ben Schachter, an analyst at Broadpoint AmTech, said Microsoft will now have to figure out the right balance between free software and enhanced services. It is a challenge many companies, from enterprise software makers to video game publishers, are also struggling with.

“The key for Microsoft will be: Can they sell more enhanced services?” he said. “It’s a fine line.”

Elop said he didn’t expect customers to abandon paid versions of Office, adding that Microsoft was developing new tools that might persuade customers to pay to use premium versions.

Analysts agreed that Microsoft will have a strong advantage as the incumbent in productivity software, a much bigger edge than Google has in the search market. That’s because users have long become accustomed to using Microsoft’s Word, Excel and PowerPoint software products and would not likely switch without good reason.