(Adds more detail, reaction)

By Huw Jones

LONDON, Nov 16 (Reuters) - Banks and companies can use a "synthetic" version of the tarnished Libor interest rate benchmark for pricing existing sterling and yen denominated contracts that have not moved to an alternative rate by the end of December, Britain's Financial Conduct Authority said on Tuesday.

The London Interbank Offered Rate, or Libor, once dubbed the world's most important number, has been used for decades to price trillions of dollars in loans, mortgages and derivatives, but is being largely scrapped on Dec. 31 after banks were fined in 2012 for trying to rig the multi-currency benchmark.

In one of the biggest market changes in decades, it is being replaced by rates compiled by central banks - but not all outstanding contracts can be shifted to these alternatives in time.

The FCA set out on Tuesday what it called some of the "final building blocks" to ending Libor, warning it would not allow the use of a synthetic versions indefinitely.

"These synthetic rates will not be available for use in any new contracts," the FCA said in a statement that finalised proposals put out to public consultation in September.

Synthetic rates, typically an adjusted form of the Libor rate compiled from estimates submitted by banks, could not be used in cleared derivatives, the FCA said.

Synthetic rates give market participants more time to shift to alternative rates such as the BoE's SONIA (Sterling Overnight Index Average).

The Association of Corporate Treasurers said financial markets would be more fragmented once Libor was scrapped with "consequential effects" on pricing or market liquidity.

Five dollar Libor settings would continue to be compiled in the usual way until the end of June 2023 for pricing outstanding contracts, but their use would not be allowed in most new contracts written after December, the FCA said.

"The move to end the use of U.S. dollar Libor in new contracts is supported by regulators in the U.S. and around the world. The FCA has provided clarification to help firms implement this restriction," the watchdog said.

Allowing a broad use of synthetic Libor would be a welcome relief to the financial sector, said Robin Penfold, a partner at law firm TLT. (Reporting by Huw Jones; Editing by Catherine Evans and Alex Richardson)