LONDON (Reuters) - Bermuda's XL Capital is one of six major insurers embroiled in a legal battle with Lloyd's.

If Lloyd's loses the battle, it may have to return millions of pounds it has already received from the insurers as well as forfeit payment on other large claims it has made, a source close to the situation told Reuters on Tuesday.

Lloyd's could also be deprived of a big chunk of its central assets, largely within the so-called Central Fund, out of which outstanding claims are paid. Lloyd's bought the policy in 1999 to protect the fund from large hits that could suck the fund dry.

Insurers have already made payments under the policy to Lloyd's totalling ?134 million ($210.5 million), but they get that back if the arbitration panel decides the claims were outside the terms of the policy, the source said.

Also, further claims Lloyd's has already made totalling around ?241 million would go unpaid, he said.

It would lose the ?125 million coverage left under the policy too.

"The full ?500 million (policy limit) is at stake," the source said. Lloyd's has refused to say how much it is owed, but a spokesman acknowledged it may have to pay back the sums it has already received if it loses the dispute.

The spokesman said Lloyd's stuck by its estimate of the biggest hit it could take if it loses.

The spokesman said: "We continue to believe our maximum exposure is ?290 million."

The policy's insurers, units of Swiss Re, General Electric (GE) subsidiary Employers Re, Hannover Re, St. Paul Cos, Chubb Corp. and XL Capital Ltd., have refused to pay further claims on the policy.

Lloyd's has refused to publicly explain why it expects its maximum exposure to be ?290 million, even though it is almost half the value of the money it could expect to receive under the policy.

An analyst who asked not to be named said the figure represents the full ?500 million minus the policy premium of around ?78 million and tax of around ?132 million it would have had to pay if it claimed the full policy limit .

Credit rating agencies Standard & Poor's and A.M. Best have affirmed their respective `A' and `A-' ratings on the market in spite of the financial uncertainty created by the dispute.

The dispute has shone a light on the intensely private world in which big insurers settle large claims between themselves.

But though the dispute has arisen when concerns about insurers' financial strength have been widely voiced, "this is a standard policy dispute that is relatively common," the source said.

The insurers notified Lloyd's last November they would not pay it any further money until it had provided them with information on why it had made the claims, as they believed they fell outside the terms of the policy, the source said.

Lloyd's responded on April 2 this year by notifying Swiss Re, which underwrote the largest portion of the risk, it would seek payment of the outstanding claims through arbitration.

Lloyd's chief executive Nick Prettejohn previously stated he believed the market had a "a very strong case" for payment.