By Liisa Tuhkanen and Alistair Smout
LONDON (Reuters) - Gains in Royal Bank of Scotland (LONDON:RBS) shares bolstered Britain's top equity index on Thursday on news it would be returned to private hands sooner than expected, while shares in Royal Mail (LONDON:RMG) fell after the government sold half its stake at a discount.
The blue-chip FTSE 100 index was up 17.70 points, or 0.3 percent at 6,847.97 by 1120 GMT, still 3.6 percent below a record high hit in April and 4.2 percent up on the year.
Royal Mail was the biggest FTSE loser, down 4 percent after the British government said it would sell half of its remaining stake in the company, leaving it with about 15 percent of the postal service.
The stock fell to 496 pence from 516.5 pence after the government sold the shares at 500p each, a discount to Wednesday's close.
Royal Bank of Scotland gained 1.6 percent after finance minister George Osborne said Britain would start selling its 32 billion pound ($49.51 billion) stake in the bank. The sale plan represents a milestone in terms of RBS's recovery from the financial crisis but also means Osborne has given up on his original intention to sell the shares for a profit.
"I think they're going to want to put this one to bed... They've recovered some of the losses, but not all of them, and they can just sort of draw a line under it and move on," ETX Capital sales trader Mark Priest said.
Also in the sector, Standard Chartered (LONDON:STAN) fell 1.8 percent, giving away some of the previous session's 5.8 percent rise as hopes that Osborne would change a bank levy system were disappointed.
Grocers such as Sainsbury, Tesco (LONDON:TSCO) and Wm Morrison rose 1.1 to 2.5 percent, extending a rally in the previous session following a reassuring update from Sainsbury.
Investors had placed record negative bets on the sector ahead of the update. As so-called "short" positions are called off, however, this can squeeze share prices higher.
An upgrade of Sainsbury to "buy" from "hold" by Cantor illustrated the improving sentiment in the sector.
"The last 18 months have been so dire for the British supermarket sector, any news that isn't terrible is seen as quite positive," David Madden, market analyst at IG, said.
"It isn't anything new that the sales of UK retailers are on the decline, so a lot of it has been factored in... I see money going back into the sector."
Among other notable movers, Vodafone (LONDON:VOD) and Johnson Matthey (LONDON:JMAT) both traded without their latest dividend payouts and lost 3.2 percent and 2 percent respectively.
