LONDON (Reuters) - British Prime Minister Gordon Brown, seeking to head off mounting public anger over bankers' bonuses, pledged yesterday to end rewards for failure in a financial system crippled by the credit crisis.

However, Brown stopped short of banning bonus payments in banks which have received state backing despite a senior figure in his ruling Labour Party saying such rewards would be "economically and politically outrageous".

With Britain's economy in recession, there has been widespread criticism after reports that state-backed Royal Bank of Scotland may pay out £1 billion ($1.5 billion) in bonuses, even though it has just posted the biggest ever loss for a British company.

"We are leading the way ... in sweeping aside the old short-term bonus culture of the past and replacing it first of all with a determination that there are no rewards for failure," Brown said in a speech in London.

Banks around the world have come under pressure to slash this year's bonuses. US President Barack Obama described reported Wall Street bonuses of $18 billion as "shameful" and the "height of irresponsibility".

Banks in France and Switzerland were among the first to announce swingeing cuts to this year's bonus payments.

British bank Barclays Plc said bonus payments across the bank would almost halve for 2008 as it reported a 14 percent drop in profit yesterday.

"We feel the heat individually and as an organisation," Barclays chief executive John Varley told reporters. One of Brown's senior ministers said bankers who lost money during the downturn and received state help have a "moral responsibility" to reject bonuses this year.

"City bankers who think that sweeping bonuses are justified this year must be on another planet," Treasury minister Yvette Cooper said.

"It would be unfair and unacceptable for them to get big payouts this year when their banks have been bailed out by the taxpayer. That's why we've told the banks where we own shares that bonuses must be curtailed."

However, Cooper said it may be hard to compel banks to scrap bonuses because staff have payments written into contracts.

Former Labour deputy prime minister John Prescott said the government should ban bonus payments within banks which received government capital in two rescue packages.

"This is morally and economically outrageous," Prescott said on the Facebook social networking site, where he launched a campaign to stop the bonuses. "This is raw capitalism and this country rejects it."

Conservative opposition leader David Cameron said bankers should "wake up and smell the coffee" and understand that some of them wouldn't have jobs without state help.

The economic gloom has boosted Cameron's poll lead ahead of an election due by May 2010. An ICM survey in the Sunday Telegraph put the Conservatives up four points on 40 percent, ahead of Labour on 28 percent.