Banks lead Britain's FTSE lower, focus on election

* Blue-chip FTSE 100 index closes 0.8 pct lower

* HSBC leads banking sector down

* Cautious trading ahead of general election

By Atul Prakash and Liisa Tuhkanen

LONDON, May 5 (Reuters) - Britain's top share index ended lower on Tuesday tracking sharp losses in the U.S. market, with HSBC leading the banking sector down after saying a bank levy was hampering its ability to pay a higher dividend.

A survey showing growth in Britain's construction industry slowed sharply in April and uncertainty about the outcome of Thursday's parliamentary election also dissuaded investors from placing strong trading bets.

After trading higher in the first, the blue-chip FTSE 100 index gave up gains and finished 0.8 percent weaker at 6,927.58 points, dragged down by a 2.2 percent fall in the UK banking index.

Europe's biggest bank HSBC, down 3.2 percent, was the biggest faller in the banking index - despite a 4 percent rise in first-quarter pretax profit - after warning that Britain's bank tax was preventing it from raising dividend payouts and that was a key concern of investors.

"The bank continues to flex its financial muscles with a reassuring update. However, concerns inevitably remain," said Richard Hunter, head of equities at Hargreaves Lansdown (LSE: HL.L - news) .

"The scope of any further regulatory fines remains unclear, the increased cost of doing business especially in the compliance area has once more received air time, whilst the potential relocation of the business provides some uncertainty."

Manoj Ladwa, head of trading at TJM Partners, said the banking sector also came under pressure following a sell-off on Wall Street on data showing U.S. trade deficit rose in March, suggesting that economic growth contracted in the first quarter, concerns about Greece and jitters before the UK election.

Greece stepped up diplomatic efforts with its euro zone partners to avoid running out of money this month, when it must make a big debt repayment to the International Monetary Fund as cash reserves dry up. Greek shares fell 3.9 percent.

Investors kept a close eye on the UK election. According to a Populus poll, British Prime Minister David Cameron's Conservatives are level with the opposition Labour Party.

Voters in the world's fifth largest economy head to the polls on Thursday with surveys suggesting that no party is likely to win an overall majority.

Losses recorded by the broader market, however, were kept in check by a rally in commodity stocks.

The UK Oil and Gas index rose 1.3 percent as oil prices rose to trade near their 2015 highs after protesters shut down the eastern Libyan oil port of Zueitina. The mining index rose 0.4 percent as prices of copper, aluminium and nickel rose 1.0 to 4.0 percent.

However, analysts remained sceptical about the continuation of a rally in energy stocks just on the back of oil price moves.

"It is good that oil prices are rebounding from their lowest, but it's far too early to say that there's a definitive recovery," Admiral Markets' analyst Darren Sinden said. (Additional reporting by Alistair Smout in Glasgow; Editing by Mark Heinrich)