By Peter Hobson

LONDON, March 24 (Reuters) - The London Bullion Market Association (LBMA) and several major banks that trade gold have asked U.S. exchange operator CME Group Inc CME.O to allow gold bars in London to be used to settle its contracts to ease disruption to trading, sources said.

The gap between gold futures on the CME's Comex exchange in New York GCc1 widened above London spot prices XAU= by as much as $70 per ounce -- or 4% -- on Tuesday.

The two usually remain within a few dollars of one another, and the gap skewed trading in the London market, causing activity to fall.

Traders feared shutdowns of air travel and precious metal refineries due to the coronavirus outbreak will make it harder to ship bullion from London to the United States to meet contractual requirements.

London is a key gold storage centre, where thousands of tonnes of metal underpin trading, but it uses 400-ounce bars which must be melted down and recast as 100-ounce bars to be accepted by Comex in New York.

The LBMA and executives at major gold-trading banks asked CME to allow 400-ounce bars to be used to settle Comex contracts, said the two sources, both of whom were involved in the discussions.

No one was immediately available for comment at CME after Reuters contacted the company via phone and email.

The rule change would obviate the need to reshape and transport metal, meaning it could remain in vaults in London while ownership is transferred. If this happened spot and futures prices could converge and markets trade normally, sources said.

"It's totally logical," said an executive at a gold-trading bank. "In London there's no shortage of metal."

The sources said the CME had not yet made a decision, and any change to its rules would likely take several days to implement and require regulatory approval.

The LBMA, which oversees the London trade hub, said it stood ready to support the functioning of the market in any way it could, without commenting further.

It earlier said it had "offered its support to CME Group to facilitate physical delivery in New York."

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Volatility in New York gold prices impacting liquidity in London- LBMA

(Reporting by Peter Hobson; Editing by Veronica Brown and Lisa Shumaker)

((Peter.Hobson@thomsonreuters.com; +44 207 542 0083;))

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