FTSE up 2.8 pct; banks lead on dividend hopes

By Michael Taylor

LONDON, Feb 18 (Reuters) - Britain's leading shares gained nearly 3 percent to close near the day's highs on Monday, led by banks on hopes of higher dividends and after the government decided to nationalise stricken lender Northern Rock NRK.L.

The FTSE 100 climbed 159.0 points, or 2.8 percent, to 5,946.6 to reverse a 1.6 percent fall in the previous session. The blue-chip index is down almost 8 percent for the year to date.

Banks led the upward trend, accounting for about 42 positive index points after traders bet on higher dividends as the sector's reporting season gets underway.

Lloyds TSB (LLOY.L: Quote, Profile, Research) gained 7.3 percent, Barclays (BARC.L: Quote, Profile, Research) added 7.6 percent and HBOS (HBOS.L: Quote, Profile, Research) tacked on 5 percent.

"It's entirely possible that dividends will be held up. The question is, are they sustainable?" said Peter Dixon, an economist at Commerzbank. "It'll help us through the short term."

Northern Rock NRK.L grabbed the headlines, in a relatively quiet trading session.

Shares in the troubled bank were suspended after the UK government said it would nationalise the mortgage lender, abandoning an attempt to snare a private sector buyer.

Analysts said the government's move would be slightly positive for British banks as a managed decline in Northern Rock's balance sheet would lead to less competitive pressure on mortgages.