Sterling jarred as EU exit campaign intensifies, but FTSE gains

* London Mayor Johnson's defection unnerves currency market

* On track for biggest daily loss vs dollar since 2010

* Bond markets also hit, raising UK yields

* Less impact on stock market as global mood improves

By Patrick Graham

LONDON, Feb 22 (Reuters) - Sterling headed towards its biggest loss in almost six years against the dollar on Monday as traders homed in on narrowing bookmaker odds on a British exit from the European Union, but the weaker pound lifted UK blue chip stocks.

The scale of the reaction on sterling, an almost 2 percent fall driven chiefly by the defection of London Mayor Boris Johnson to the "out" camp on Sunday, also sent government bond prices spiralling lower.

London's stock markets, however, were up more than 1 percent.

"The out camp were struggling to get a figurehead who was popular and Boris has given them that boost," said Alvin Tan, a strategist with French bank Societe Generale (Swiss: 519928.SW - news) in London.

"There is genuine worry that Britain might vote to leave and the uncertainty is going to rise into the referendum."

The cost of hedging against falls in the exchange rate shot up to its highest in more than four years and the Bank of England's trade-weighted measure of the pound's value hit a 15-month low.

Concern over Britain's possible exit from the EU -- "Brexit" -- have been at the heart of a fall in sterling since November and several banks are now talking up the chances of a slide to as little as $1.30 from $1.4155 on Monday.

"We've not seen many Brexit trades being put on (today) but our corporate desk is seeing more hedging being put on by corporates who have sterling exposure," Morgan Stanley (Xetra: 885836 - news) analyst Jacob Nell said.

Nell, who expects the pound to fall to $1.30 by the end of 2016 in the event of a Brexit, said he would be watching for signs of how active Johnson plans to be in campaigning in the months ahead.

Opinion polls and further turbulence around migration or terrorist attacks on cities in Europe may also shift sentiment, he said.

STOCK SPLIT

Beyond the currency, the impact on business, banking and policy of a four-month run-in to the June 23 vote looks more nuanced.

Some banks have raised the prospect of the Bank of England cutting record-low interest rates further to offset any damage to economic growth in the short-term.

That might weaken the pound but could further inflate the value of other assets including stocks seen as well-insulated against the negatives of a Brexit.

U.S (Other OTC: UBGXF - news) . bank JP Morgan recommended buying British exporters against domestically focussed companies and blue chip stocks over smaller-cap stocks.

"In the event of the UK leaving, the initial knee-jerk impact on the market could be quite negative," JPM said.

"But we believe the resulting weakness of sterling and the BoE (Shenzhen: 000725.SZ - news) action will cushion a chunk of the fall in equities."

The FTSE 100 index rose 1.4 percent while the smaller-cap FTSE 250 gained less - around 1 percent.

"We expect UK markets to be volatile over coming days as the campaigns step up a gear, but our central case remains that the UK population will decide to remain in the EU," UBS (NYSEArca: FBGX - news) economists Dean Turner and Bill O'Neill wrote in a note.

"Our 'Brexit' probability remains at 30 percent as we monitor the public response to the agreement with other EU members." (Editing by John Stonestreet and Peter Graff)