HSBC To Pay More Than $2 Billion In Penalties

* $700 mln provision for U.S. anti-money laundering failures

* Cost of U.S. fine, charges may be "significantly higher" -CEO

* $1.3 billion set aside to compensate UK customers for mis-selling

* Shares up 0.7 percent

By Steve Slater and Matt Scuffham

LONDON, July 30 (Reuters) - HSBC's boss said on Monday revelations of lax anti-money laundering controls had been "shameful and embarrassing" for Europe's biggest bank, and may force it to pay out well over $2 billion for those flaws and in compensation for UK mis-selling.

HSBC set aside $700 million to cover fines and other costs for an anti-money laundering scandal, after a U.S. Senate report criticised it this month for letting clients shift funds from dangerous and secretive countries, notably Mexico.

The ultimate cost could be "significantly higher", the bank's Chief Executive Stuart Gulliver said.

"What happened in Mexico and the U.S. is shameful, it's embarrassing, it's very painful for all of us in the firm," Gulliver told reporters on a conference call.

"We need to execute on the compliance changes and then prove ourselves worthy and rebuild this over a number of years. There are no quick and easy fixes," he said.

The Senate report criticised a "pervasively polluted" culture at the bank and said HSBC's Mexican operations had moved $7 billion into its U.S. operations between 2007 and 2008.

The provision ate into first-half underlying profits, which fell 3 percent from a year earlier to $10.6 billion, excluding gains from assets sales and losses on the value of its own debt.

HSBC also set aside another $1.3 billion to compensate British customers for mis-selling loan insurance to individuals and interest rate hedging products to small businesses.

It is also one of more than a dozen banks under scrutiny in a global interest rate-rigging scandal that has rocked the sector and further damaged the reputation of bankers following criticism of their culture and standards.

"It's very unfortunate and deeply concerning that even the banks considered more secure such as HSBC are so seriously at risk," said a top 30 investor in HSBC.

"And the news is still coming out - we have yet to see the impact, if any, of the Libor investigation and HSBC's role in that. It's hard to see how much more bad news the markets can take," said the investor, who asked not to be named.

Shares in HSBC were up 0.9 percent to 535.8 pence at 1230 GMT, lagging a 2 percent rise in Europe's bank index.

"LOST ITS WAY"

U.S. and British authorities fined fellow UK-based bank Barclays $453 million for manipulating Libor, a benchmark interest rate based on how much banks charge to lend to each other. More banks are expected to be drawn into the investigation into banks submitting false rates from which Libor is calculated daily.

Thomson Reuters Corp is the British Bankers' Association's official agent for the daily calculation and publishing of Libor.

Gulliver said that as a contributor to Libor and its euro zone equivalent Euribor, HSBC was cooperating with regulators with their investigation. However, it was far too early to say what the outcome would be or to estimate the potential cost for the bank.

HSBC said it was in talks to settle the investigation into its U.S. anti-money laundering compliance with the U.S. Department of Justice and other regulators. "It may take several more months to come to fruition," Gulliver said.

He is mid-way through a deep overhaul to cut costs, sell or shrink unprofitable businesses, and to direct investment to faster growing Asian markets. That has seen the bank cut 27,000 jobs since the start of 2011.

It also includes centralising control functions over a bank that was unwieldy. Gulliver said he was aware of the investigation into its U.S. compliance problems in 2010, before he took over, and that shaped some of his restructuring.

"The firm clearly lost its way in this regard and it's right that we apologise," he said. "Colleagues internally have been aware that this is the backdrop of why we had to change the firm."

HSBC said it had increased its spending on compliance to more than $400 million last year, more than double its $200 million in 2010.

Behind the problems the bank had shown "a pretty good set of numbers" and quick execution on his strategy, said Gulliver.

The bank reported a statutory pretax profit of $12.7 billion for the six months to the end of June, up 11 percent on the year and above an average analyst forecast of $12.5 billion, according to a poll by the company.

Its investment bank's profit rose 5 percent on the year to $5 billion, faring better than rivals in a tough market where activity has been hit by the euro zone crisis.