Britain's FTSE gains despite insurers, LSE weakness

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* FTSE 100 up 0.2 pct

* Motor insurers hit by rate change

* London Stock Exchange (Other OTC: LDNXF - news) slumps on merger disappointment

* Weak sterling supports index

* FTSE set to end the month higher

By Helen Reid

LONDON, Feb 27 (Reuters) - Britain's major share index was up on Monday, boosted by earnings updates and a weak sterling, while motor insurers were hit by a regulatory change which could lead to higher payouts, and merger disappointment weighed on LSE shares.

The FTSE was up 0.2 percent by 0940 GMT. It was set to end the month 2.2 percent higher, after having retreated last month.

Sterling fell to a 12-day low, supporting the foreign-currency earning index higher.

Admiral and Direct Line (Other OTC: DIISD - news) were top fallers on the index, down 4.5 to 7.4 percent.

The motor insurers were hit by the government's reduction of a rate which discounts certain large motor claims. The Ministry of Justice cut the discount rate to minus 0.75 percent from 2.5 percent.

"We expect today's change to lead to premium price increases, in addition to those required to pass on ongoing non-bodily injury claims inflation," UBS (LSE: 0QNR.L - news) analysts said in a note.

Direct Line said it expected profit before tax to fall by 215-230 million pounds. Consultancy PwC said the rate change would add 50 to 75 pounds to the average motor insurance policy.

Direct Line was headed for its worst day since June, while Admiral was experiencing its heaviest losses since August. Insurer Aviva was also down 1.1 percent.

London Stock Exchange was a top faller after its plans to merge with Deutsche Boerse (IOB: 0H3T.IL - news) faltered. LSE said it believed the European Commission is unlikely to provide clearance for the merger with its German peer.

LSE shares were down 3.2 percent, headed for their worst day since the Brexit referendum aftermath in June.

RBS (LSE: RBS.L - news) was down 1.8 percent, maintaining Friday's move down after the bank's results disappointed.

Outweighing the moves lower were steady gains led by Bunzl (LSE: BNZL.L - news) , Convatec and Unilever (NYSE: UL - news) .

Business supplies firm Bunzl posted better-than-expected results, boosting it to the top of the FTSE, up 2.3 percent. Convatec, the medical supplies company, was also up 1.6 percent.

Unilever was gaining 1.5 percent. Near Friday's close Chief Financial Officer Graeme Pitkethly said the Kraft Heinz bid had been a "trigger moment" for Unilever to focus more on short-term value creation.

Retailer ABF, which owns discount fashion brand Primark, was down 0.7 percent after its results.

"Primark's subdued like-for-like and upcoming margin headwinds are unlikely to prove conducive to continued near-term valuation rebuild," said Jefferies analysts, who have a 'hold' rating on the stock.

On the mid-cap index, bus operator National Express (Frankfurt: 888871 - news) was a top gainer, hitting a four-month high after Liberum, a top-rated analyst for the stock, upgraded it to 'buy' from 'hold', citing diversification within public transport operations as a positive for the company.

Premier Oil (LSE: PMO.L - news) was the top gainer in the small-cap index, up 10.9 percent. The oil company said it was making progress over refinancing, in an update just before the close on Friday. (Editing by Ed Osmond)