Shares in UK banks rose on Monday on hopes of higher dividends and after the British government decided to nationalize stricken mortgage lender Northern Rock.

This is slightly positive for the sector as the expected managed decline in the Northern Rock balance sheet should create less competitive mortgage market conditions, Bear Stearns analyst Robert Sage said in a note.

Barclays rose 6 percent to top the gainers' list on the FTSE 100, which was up 1.7 percent and was the biggest blue-chip gainer in Europe . The sector accounted for one-third of FTSE's rise.

HBOS advanced 3.6 percent, Royal Bank of Scotland climbed 3.1 percent, Lloyds TSB gained 4.6 percent, Standand Chartered added 4.1 percent, HSBC put on 2.3 percent and mid-cap Bradford & Bingley added 1.7 percent.

Investors in Northern Rock, Britain's most prominent casualty of a global credit market turmoil, have reacted with anger to the prospect their shares could be worthless after the nationalisation.

Shares in hedge fund RAB Capital, one of Northern Rock's biggest shareholder, fell as much as 10 percent.

Barclays and Lloyds were also helped up by a Sunday Times report, saying that the two banks were likely to lift their dividend payments when they report their results this week.

There was a Sunday Times article talking about Barclays and Lloyds increasing their dividend and saying results would be fine, a trader said.

Barclays, Britain's third-largest bank, is due to report its 2007 earnings on Tuesday, followed by Alliance & Leicester on Wednesday and Lloyds on Friday.

Banking shares have been hit hard by the gloabl market ructions stemming from a meltdown in the risky U.S. subprime mortgages, with investors concerned about more nasty surprises from credit-related losses.

Analysts expect Barclays to announce further writedowns, but the amount should be modest and partially offset by an increase in the fair value of the debt it carries.

(Reporting by Dominic Lau and Steve Slater; Editing by Louise Ireland)