Britain's FTSE 100 hits three-week high as banks rally

* UK's top share index up 1.4 pct at close

* RBS (LSE: RBS.L - news) leads banks higher

* Old Mutual (Other OTC: ODMTY - news) gains after confirming approaches for stake

* Coca-Cola HBC hit by stake sale (Updates prices at close)

By Kit Rees and Alistair Smout

LONDON, May 24 (Reuters) - Britain's top share index rose on Tuesday, bolstered by a rally in banking stocks and a well-received trading statement from Kingfisher (LSE: KGF.L - news) .

The FTSE 100 index was up 82.83 points, or 1.4 percent, at 6,219.26 points at its close, touching a three-week high.

The rally was broad-based, with grocer Tesco (Xetra: 852647 - news) , Old Mutual, Legal & General (LSE: LGEN.L - news) and Royal Bank of Scotland and all gaining between 4.8 percent and 6.8 percent.

Royal Bank of Scotland rose after a U.S (Other OTC: UBGXF - news) . appeals court voided a Bank of America Corp mortgage penalty.

Investors said this could mean that the U.S. Department of Justice might now relax its stance on mortgage settlements.

RBS is preparing for the biggest fines in its history to settle U.S. investigations into accusations that it misled investors in mortgage-backed securities.

Analysts also said that the UK banking sector, which rose 2.4 percent, was boosted by readacross from a 9 percent rise in underlying profit at Nationwide Building Society, Britain's biggest customer-owned lender, as mortgage lending increased to volumes last seen before the 2007-08 financial crisis.

"UK banks are once again in demand, with a reported rise in mortgage activity at Nationwide (LSE: NBS.L - news) further enhancing the attractiveness of names like RBS," Chris Beauchamp, senior market analyst at IG (LSE: IGG.L - news) , said in a note.

Financial services firm Old Mutual rallied 5.9 percent after confirming it had received multiple approaches from potential buyers of its stake in U.S. fund firm Old Mutual Asset Management (OMAM).

Kingfisher rose 3.5 percent, among top gainers after the owner of the B&Q chain reported a 3.6 percent increase in like-for-like sales in the first three months of its financial year. Traders said its UK and French divisions had performed better than expected.

"In its first half-year, it is a little early to be judging the returns from the five-year 'One Kingfisher' strategy but management is pleased with progress so far," David Stoddart, analyst at Edison Investment Research, said in a note.

Tobacco firm Imperial Brands (Other OTC: IMBBY - news) rose 3 percent, benefiting from an upgrade by Barclays (LSE: BARC.L - news) to "overweight" from "equal weight".

"Imperial is executing strongly. Organic sales momentum is improving and margin/cash generation increases underpin (at least) 10 percent dividend growth," analysts at Barclays said in a note.

"Moreover, we are increasingly confident margins will surprise to the upside and that the U.S. is performing ahead of expectations."

Coca-Cola HBC, however, was among the top fallers, down 3 percent after a shareholder said it was going to sell its 1.5 percent stake in the bottling company.

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Mike Dolan, Markets Editor EMEA. (Reporting by Alistair Smout; Editing by Richard Balmforth)