British stock market surges on Conservatives' strong election result

* FTSE 100 rises back near record highs

* FTSE 250 mid-cap index also hits new all-time highs

* Conservatives set to come out on top in British election

* Banks, utilities, housebuilders outperform

By Sudip Kar-Gupta

LONDON, May 8 (Reuters) - Britain's stock market surged higher on Friday after initial election results showed that Prime Minister David Cameron's Conservatives were set to govern for another five years.

The blue-chip FTSE 100 index rose 1.6 percent to 6,995.25 points in early session trading, within touching distance of the record high of 7,122.74 points reached last month.

The FTSE 250 mid-cap index also hit an all-time high as the election results came through, setting the Conservatives on track for an overall majority in the face of many analysts' predictions of a hung parliament.

The FTSE 100 Volatility Index, which had risen on Thursday as uncertainty about the election result had increased, nosedived in the early minutes of trading before settling at its lowest level since early April.

Many investors had backed the Conservatives over the opposition, centre-left Labour Party which had set out tough new regulations on industries such as banking, utilities, real estate and gambling which could have hit the profits of companies in those sectors.

Labour wanted to give the energy regulator the power to force firms to cut prices in response to falls in wholesale costs, as part of the party's campaign to improve living standards.

It also wanted a new levy on online betting and to impose market share caps in areas such as retail banking and small business lending.

The risk of that evaporated with the strong showing of the right-leaning Conservatives.

"Leisure, real estate and banking shares will enjoy a strong run today, as will the utilities companies," said Securequity sales trader Jawaid Afsar.

British bank Lloyds jumped up by 6.6 percent, while the FTSE 350 Banking Index rose 2.9 percent to have its best day since July 2013.

Utility Centrica advanced 6.4 percent while betting company Ladbrokes (LSE: LAD.L - news) surged 9 percent.

Real estate company Foxtons rose around 10 percent while online property search company Zoopla also advanced 4.7 percent.

The FTSE 100 is up by nearly 7 percent since the start of 2015, buoyed by an economic recovery in Britain and record low interest rates, which have hit returns on bonds and cash and driven investors to the better returns available from shares.

Some traders said that the British election result still contained some negative risks for investors.

In Scotland, once a Labour stronghold, nationalists won almost every seat, a result likely to stoke momentum for Scottish independence by underscoring the political chasm that divides voters north of the border and the rest of the United (Shenzhen: 000925.SZ - news) Kingdom.

A Conservative victory also means Britain is likely to face a historic in-out European Union referendum within two years.

However, traders said investors would be prepared to overlook those risks for the immediate term.

"The voting class have decided they like the idea of more cuts to the public sector and to keep David Cameron in control of the fragile but growing economy," said InterTrader's chief market strategist Steve Ruffley. (Additional reporting by Atul Prakash and Francesco Canepa; Editing by Andrew Heavens)