LONDON (Reuters) - Financial institutions must stop encouraging excessive risk-taking with huge bonuses, Bank of England Governor Mervyn King said yesterday, as he blamed banks and their compensation culture for the credit crunch.

In his most outspoken attack on the search for profits and multi-million pound salary packages awarded in the City of London, King said banks had thrown caution to the wind and must not return to the easy lending practices of the last few years. "Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change," he told lawmakers.

Financial-sector remuneration has become a hot topic for shareholders, unions and politicians in the wake of the sub-prime crisis as banks reporting multi-billion dollar losses are still paying out multi-million dollar bonuses.

King said it was "unattractive" that so many young people chose working in banks over others careers just because of the high pay on offer. "That is not an attractive position to be in when such a high proportion of our talented young people naturally think of the City as the first place to work in. It shouldn't be. It should be one of the places but not the only one," said the respected former London School of Economics professor.

King's comments echo those of finance minister Alistair Darling who said in February that Britons were "fed up" with large City of London payouts and rich bankers should think about donating more of their wealth to charity.

London is Europe's leading financial centre and employs hundreds of thousands of people. Some £7 billion ($14 billion) in bonuses were estimated to have been paid in the first few months of 2008. After taking a hard line on bailing out banks for most of last year, King unveiled a plan last week that would allow them to swap risky mortage assets for at least £50 billion of government debt.

That comes at a price, King said, and was in no way a bail-out. He argued it was needed because confidence in the banking system was so fragile that even unfounded rumour could prompt a run on a retail bank.

"It is not designed to ... kick-start the mortgage market," King said, referring to the plan which the central bank announced last week. "It would be a serious mistake to go back to where the mortgage market was a year ago," he said.