Britain's FTSE edges up before BoE meets, RBS gains

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* FTSE 100 up 0.1 pct

* RBS (LSE: RBS.L - news) up on smaller-than-expected US settlement

* BT drops after disappointing update, job cuts

* Randgold, Superdry down after results, Next (Frankfurt: 779551 - news) up

By Danilo Masoni

MILAN, May 10 (Reuters) - The UK's top share index hovered around its highest level since end January ahead of a Bank of England meeting which is expected to keep rates on hold, while shares in Royal Bank of Scotland surged after it settled a probe in the United States.

By 0823 GMT, the FTSE index rose 0.11 percent at 7,671 points, with gains limited by a heavy drop in BT shares after the phone company reported a disappointing update and announced plans to cut thousands of jobs.

Bank of England interest rates looks set to stay on hold on Thursday, after unexpectedly weak economic data and cautious remarks from Governor Mark Carney dashed the chances of what until a few weeks ago looked like a near-certain increase.

"It is also quite likely that the Bank may well have to guide its growth expectations lower ... Inflation expectations could also be revised lower, which in term could see the pound come under further pressure," said Michael Hewson, Chief Market Analyst at CMC Markets (LSE: CMCX.L - news) .

Weakness in the pound against a surging dollar has been supporting the FTSE recently helping the internationally exposed index recover from losses suffered at the start of the year.

RBS rose 4.5 percent after it agreed to pay a smaller-than-expected $4.9 billion to resolve a U.S. investigation into its sale of mortgage-backed securities.

Analysts, who had estimated the U.S. could impose a fine of up to $12 billion, said the bank could reinstate a dividend.

"It’s a happy day for RBS, with the DoJ settlement coming in well below what we had feared," said Neil Wilson, Chief Market Analyst at Markets.com.

"This removes the last great barrier to the government selling off its stake and we would envisage that the chancellor will expedite the disposal of its 71% shareholding. The settlement also paves the way for a quick return to annual profits after ten years of losses and dividends will once again start flowing," Wilson (Oslo: WILS.OL - news) added.

BT however fell 7.8 percent.

Traders said its latest update showed a disappointing guidance, while Jefferies analysts highlighted that the company missed on the opportunity of announcing a bolder mover of fiber roll out while the 13,000 job cuts were bigger then expected.

Randgold was another weak spot, down 8 percent after its quarterly profit fell, while Next rose 7.7 percent after a strong outlook and trading update.

Among mid-caps, Superdry plummeted 12 percent after the fashion retailer said it expected 2018 full-year gross margins to decline and it gave a weaker than expected revenue forecast for 2019.

Data showing British industrial output barely rose in March, confirming a glum first quarter for the economy, had limited impact on UK equities ahead of the BoE (Shenzhen: 000725.SZ - news) rate due at 1100 GMT. (Reporting by Danilo Masoni Editing by Richard Balmforth)