With this settlement, two out of three lawsuits brought this year by the Australian Securities and Investments Commission against the nation's No.2 lender have been resolved.

The ASIC has previously also taken action against units of Goldman Sachs and wealth management giant AMP Ltd, while charging Citigroup with rigging a capital raising.

Westpac's ASIC settlement comes at a time when Australia is beefing up scrutiny and control of its A$100 billion financial services sector as an inquiry airs allegations of widespread misconduct, including charging customers fees for no service, irresponsible lending and deception of regulators.

"This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated," ASIC Chairman James Shipton said in a statement, of the Westpac fine.

Analysts, however, said the financial impact from the fine would be "immaterial" given it was only a fraction of Westpac's latest A$8 billion annual profit.

Shares of the lender slipped 0.8 percent on Tuesday, in line slight losses in the broader market <.AXJO>.

"Given this settlement appears to cover off on a relatively wide range of loans ... this should somewhat alleviate the market's concern around the regulatory risk relating to WBC's responsible lending requirements," Goldman Sachs said in a note.

RESPONSIBLE LENDING OBLIGATIONS

ASIC said the country's oldest bank had breached consumer lending law when its automated loan approval system failed to consider people's declared living expenses when deciding if they could repay a home loan.

Of 260,000 loans approved over a three-and-a-half-year period from 2011-2015, Westpac ignored living expenses for 50,000 and miscalculated another 50,000 borrowers' ability to repay their debts.

The bank should not have approved about 10,500 loans, it added, or four percent of the total. The A$35 million fine, which still must be approved by a court, is the highest for a breach of consumer lending laws, ASIC said.

Westpac accepted ASIC's allegations in a statement.

The inappropriately approved loans have performed similarly to other loans, it said, adding it was monitoring them.

"Westpac takes its responsible lending obligations very seriously and this action does not relate to our current lending practices," said its consumer bank CEO, George Frazis.

Earlier this year, Westpac was found to have the riskiest mortgage-book among the four banks dominating about 80 percent of the Australian market, according to UBS analysts.

ASIC also sued Westpac in June over a financial planner it alleged gave poor advice for years.

ASIC UNDER PRESSURE

The regulator has come under pressure to prove its effectiveness with the inquiry airing sometimes daily allegations of wrongdoing.

Last month, the chairman of the country's sovereign wealth fund accused it of being "not awake at the wheel".

The regulator also lost one of its cases against Westpac when a court accepted the bank's defence that it did not intentionally rig a key bank trading rate.

According to CLSA banking analyst Brian Johnson, the fine amounts to "being beaten around the head with a feather duster".

TS Lim, a banking analyst at Bell Potter, however, pointed out that while the settlement was "not material", the fact that Westpac was taking steps to remediate the issue was a positive.

(Reporting by Byron Kaye and Paulina Duran; Editing by Stephen Coates and Himani Sarkar)

By Byron Kaye and Paulina Duran