LONDON, May 23 (Reuters) - Britain's finance ministry said it was "working through internal due process" when asked to clarify the possible impact of a July 4 election on the government's proposed retail offer in NatWest, a spokesperson told Reuters in an emailed statement on Thursday.

The heavily-anticipated stock sale, a key milestone in the full privatization of the taxpayer-backed bank, is hanging in the balance after Prime Minister Rishi Sunak said on Wednesday Britain would be heading to the polls in less than two months.

Shares in the lender, which have gained more than 40% this year to date, were trading 2% lower at 1002 GMT, as investors waited for official confirmation that the proposed offer would be mothballed.

Chancellor Jeremy Hunt and UK Government Investments, the agency that manages Britain's holding in NatWest, were planning the sale to jumpstart ambitions to promote wider retail ownership of UK stocks.

But the imminent election places the decision on how to offload the taxpayer's remaining shares in NatWest in the hands of the next government, sources told Reuters on Wednesday.

Analysts at Peel Hunt said the sale could not take place before an election and it was also unclear whether the Labour Party, which is hotly tipped to lead the next government, would proceed with the initiative.

"Although the UK Government is a passive investor only in NatWest, the presence of the State on the share register in our view is not helpful for the rating of NatWest's shares," they said in a note.

"Whilst this development does not alter our positive view on the outlook for the company and its shares, the uncertainty is modestly unhelpful for NatWest in our view."

As Britain's biggest casualty of the 2008-9 financial crisis, the lender formerly known as Royal Bank of Scotland had been preparing to end what its chairman recently called the "sorry tale" of its partial state ownership.

The bank succumbed to a 46-billion pound ($58 billion) bailout in 2008. Since then, a slew of CEOs have transformed NatWest from a sprawling global bank into a tightly-run domestic player, focused on UK household, consumer and business lending.

Some market commentators had cautioned against Hunt’s proposed sale, fearing that bank stocks may not be a wise investment for some inexperienced investors as a cost of living squeeze continues.

The government held just under 27% of the bank's stock as at May 13.

"The 7 billion pounds value of the government's NatWest stake means we think completing the sell-down will be attractive to a future UK government," Bank of America said in a research note.

"A retail offer might no longer be a preferred vehicle but could be replaced by an additional institutional placing," the note said, adding that a full disposal of the taxpayer's stake in 2025 was likely. (Reporting By Sinead Cruise; additional reporting by Danilo Masoni, Editing by Amanda Cooper)