Such a penalty would be more than double the $450 million fine levied on British bank Barclays in June by US and British regulators and would be the third massive US fine to hit big European banks this week.

"The global settlement is about $1 billion," the source said. "It's expected early next week - on Monday or Tuesday."

UBS declined to comment. Britain's Financial Services Authority and the US Department of Justice and the Commodity Futures Trading Commission (CFTC) all declined to comment.

Barclays was the first - and so far only - bank to settle charges of rigging the London interbank offered rate, known as Libor, a benchmark used for trillions of dollars worth of loans around the world. Tiny shifts in the rate, compiled from daily polls of bankers, could benefit dealers in complex products.

The fallout from the scandal forced Barclays' chairman and chief executive to quit and prompted a political and public backlash against standards in banking across Europe and the United States. That was partly due to details in the Barclays settlement showing how traders brazenly gamed the system.

Libor is used to price financial products worth more than $300 trillion worldwide and regulators across the world are investigating more than a dozen banks for alleged rigging of rates going back to 2005 or even earlier.

This week British police and anti-fraud officers made the first arrests in connection to the probe, detaining a former trader and two other men, sources said.

One of those arrested was former UBS and Citigroup trader Thomas Hayes, according to a source familiar with the situation. The two others worked at interdealer broker RP Martin, according to a separate source.

TORRID TIME FOR UBS

The fine will mark another blow to UBS, which has had a tough 18 months after suffering a $2.3-billion loss in a rogue trading scandal, management upheaval and thousands of job cuts.

"I'm not sure how much more reputational damage can be done to UBS," said Chris Wheeler, analyst at Mediobanca in London. "They are rebuilding that slowly, but it won't help the wealth management business when you see this as a headline."

Banks are keen to put such fines behind them as they attempt to rebuild credibility among politicians, the general public and investors following the financial crisis which forced taxpayers to bail out companies which had gambled themselves into trouble.

After months of criticism about poor standards and a culture of immorality, incompetence or both across the banking industry, banks' profits and capital are also taking heavy hits and more fines for past malpractice appear likely.

"The trend is this is now an ongoing cost of doing business," said Wheeler at Mediobanca. "It looks like it's going to be a drain on the banks for some time."

HSBC on Tuesday reached a $1.92 billion settlement with US authorities over money laundering, the highest ever fine on a bank, a day after another London-based bank, Standard Chartered, agreed to pay $327 million for violating US sanctions against Iran, Sudan and other states, adding to an earlier $340 million for similar breaches of regulations.

Deutsche Bank, Germany's flagship lender, was raided on Wednesday by about 500 German tax inspectors and police, who arrested five staff in a probe linked to a tax scam involving the trading of carbon permits.

Britain's Royal Bank of Scotland is also expected to reach a settlement on Libor manipulation shortly.

Investigators are assessing whether banks used responses to the daily survey of the rates they would offer to other banks to try to nudge Libor, perhaps by only a few hundredths of a percentage point. Such a move could still benefit their own trades in bonds or more complex deals linked to that rate.

Banks found guilty also face civil lawsuits from those they traded with. Some borrowers complain they paid more interest than they should have, although others may have paid less.

Reuters' parent company Thomson Reuters Corp collects information from banks and uses it to calculate Libor rates according to specifications drawn up by the British Bankers Association (BBA).

Center>Copyright Reuters, 2012