FTSE soars 6.5% early on US hopes, shorting rules

* FTSE 100 rises 6.5 pct to snap 4-day losing run * Financials top-weighted gainers on U.S. asset plan * FSA bans short-selling on some financial stocks (For a TAKE A LOOK on the financial turmoil, click on [ID:nN18385211])

By Dominic Lau

LONDON, Sept 19 (Reuters) - Britain's top share index rallied 6.5 percent early on Friday to snap a four-day losing run, led by banks on hopes of a comprehensive U.S. plan to purge toxic debt and end turmoil that is engulfing financial markets.

A ban by UK finanical regulators on short-selling of some financial stocks also boosted the market.

By 0755 GMT, the FTSE 100 .FTSE was up 315.4 points at 5,195.4, recovering some of the 9.9 percent losses in the previous four sessions. The UK benchmark has fallen 19.8 percent so far this year.

"So far policymakers have dealt with it on a piece by piece basis and they have not got ahead of the curve. This is capable of getting them ahead of the curve. This is very good news," said Neil Dwane, chief investment officer in Europe for RCM.

Beaten-down banks rebounded sharply, tracking gains in the U.S. and Asian markets. Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz), HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) surged between 10.5 and 30 percent.

Wall Street had its biggest percentage gain in six years on Thursday after a congressional aide said U.S. Treasury Secretary Henry Paulson has been shopping around a proposal to congressional lawmakers that would create an entity to deal with the billions of dollars of bad debt still clogging the financial system.

The idea has been compared to the Resolution Trust Corp formed in 1989 to fix the savings and loan industry collapse.

European shares were also up sharply in early trade, while the iTraxx Crossover index tightened and the dollar jumped against the euro and the yen.

In the UK, the Financial Services Authority imposed a temporary ban on short-selling financial stocks from Friday, and the top U.S. securities regulator was said to be weighing a similar measure in a bid to stablise stocks prices.

New York state's pension funds on Thursday joined other public pensions that temporarily stopped lending bank and brokerage stocks to short sellers, the state comptroller said, adding that he wanted to starve "this speculative fire."

Insurers also registered strong gains, with Prudential (PRU.L: Quote, Profile, Research, Stock Buzz), Old Mutual (OML.L: Quote, Profile, Research, Stock Buzz), Standard Life (SL.L: Quote, Profile, Research, Stock Buzz), Admiral Group (ADML.L: Quote, Profile, Research, Stock Buzz) and Aviva (AV.L: Quote, Profile, Research, Stock Buzz) rising 13 to 22 percent, while London Stock Exchange (LSE.L: Quote, Profile, Research, Stock Buzz) soared 10.6 percent and hedge fund Man Group (EMG.L: Quote, Profile, Research, Stock Buzz) gained 5.2 percent.

BOUNCING COMMODITIES

Energy stocks rose along with higher crude prices CLc1. BP (BP.L: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), gas producer BG Group (BG.L: Quote, Profile, Research, Stock Buzz), Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) and Tullow Oil (TLW.L: Quote, Profile, Research, Stock Buzz) were up between 1.6 and 7.8 percent.

In the mining sector, BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz), Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz), Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Vedanta Resources (VED.L: Quote, Profile, Research, Stock Buzz) and Antofagasta (ANTO.L: Quote, Profile, Research, Stock Buzz) gained 5.9 to 8.3 percent as precious metal prices stayed firm. Retailers and property shares were also in demand with the improving sentiment. Marks & Spencer (MKS.L: Quote, Profile, Research, Stock Buzz), Next (NXT.L: Quote, Profile, Research, Stock Buzz), Hammerson (HMSO.L: Quote, Profile, Research, Stock Buzz), Land Securities (LAND.L: Quote, Profile, Research, Stock Buzz), British Land (BLND.L: Quote, Profile, Research, Stock Buzz) and Kingfisher (KGF.L: Quote, Profile, Research, Stock Buzz) climbed 5.9 to 7.8 percent.

"The Dow Jones volume absolutely exploded yesterday and I don't think anyone would want to be short for the next few days," said Mike Estrey, research director at Fyshe Horton Finnery.

"This should be one of the days that makes it worth investing in the stockmarket, and the winners could come from all angles." (Editing by David Cowell)