Britain's FTSE set for weekly gain, steadies against stronger sterling

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* FTSE 100 flat

* Tullow Oil (LSE: TLW.L - news) drops on 607 mln stg share sale

* RBS (LSE: RBS.L - news) rises as Natixis (LSE: 0IHK.L - news) upgrades its view

* Circassia (Stuttgart: 23863607.SG - news) soars 28 pct on Astrazeneca (NYSE: AZN - news) drug deal

* Berkeley rises on rosier forecast despite London pinch

* Small-caps outperform European indexes

By Helen Reid

LONDON, March 17 (Reuters) - British shares were flat on Friday against weaker European markets, holding close to Thursday's record high and set to post a weekly gain.

The FTSE 100 index was flat in percentage terms, pressured by a stronger sterling, which jumped on Thursday after outgoing Bank of England policymaker Kristin Forbes unexpectedly voted for a rise in interest rates.

"Mixed appetite in commodities added to the stronger pound could keep the appetite limited and point at a weekly close below 7400p," said Ipek Ozkardeskaya, analyst at LCG Markets.

The blue-chip index was set for a 1 percent weekly gain.

Royal Bank of Scotland was the top blue-chip gainer, up 1.9 percent after Natixis upgraded its view on the bank, saying the investment thesis was reaching a turning point.

"The time is near when the long-standing strengths of the core bank will outweigh the material drag of legacy items," the bank said.

Banks across Europe were outperforming the broader indexes, after comments from European Central Bank policymaker Ewald Nowotny raised the prospect of an interest rate rise in the bloc.

The bigger moves in British stocks were in mid-caps and small-caps.

Tullow Oil dropped 15 percent, the top European faller, after it announced a 607 million pound share sale to cut its $4.8 billion debt burden.

The rights issue was offered at a 45.2 percent discount to yesterday's closing price.

"We believe today's announcement provides sufficient liquidity to get through 2018 but Tullow may still need to refinance its $3.3bn reserve-base loan and/or farm-down Kenya to avoid the risk of value leakage through project deferrals in 2019 and beyond," said UBS (LSE: 0QNR.L - news) analysts.

London-focused housebuilder Berkeley rose to its highest since the Brexit vote, up 5.5 percent after it forecast full-year profits at the top end of market estimates despite demand falling in the capital.

"Today's statement is a clear signal of the disconnect between the new build and second hand market," said Jefferies analysts.

"While London-based estate agents are feeling the cold, Berkely Group is warming itself in the Spring sunshine."

Valve maker Weir Group (Other OTC: WEIGY - news) was up 3 percent and among top European performers after Barclays (LSE: BARC.L - news) upgraded the stock to 'overweight', forecasting double-digit order growth over 2017-18.

The small-cap index was outperforming other major share indexes, up 0.2 percent as biotech company Circassia soared.

Circassia gained 23 percent after it signed a deal with Astrazeneca to develop and commercialise drugs Tudorza and Duaklir, licenced by Spain's Almirall, in the U.S.

The firm lost more than half its market value in June 2016 when its experimental cat allergy treatment failed a late-stage trial.

It was set for its biggest ever daily gains. (Reporting by Helen Reid, editing by Pritha Sarkar)