* FTSE 100 index closes 0.8 percent higher
* FTSE "fear gauge" slumps, biggest one-day drop in 19 mths
* ARM gains; Goldman Sachs adds to Conviction List
* Bovis Homes buoyed by enhanced dividend policy
By Atul Prakash
LONDON, Aug 18 (Reuters) - Britain's top share index climbed to a two-week high on Monday, with sentiment improving on relief that a feared escalation in the Ukraine crisis had failed to materialise.
Tensions spiked on Friday when Ukraine said it had partially destroyed an armoured column that had crossed the border from Russia, triggering a sell-off in global shares. But Moscow made no threat of retaliation, describing the report as a "fantasy".
The blue-chip FTSE 100, which rose nearly 1 percent on Friday before erasing gains to end flat, finished 0.8 percent higher at 6,741.25 points on Monday.
The FTSE volatility index, a gauge of investor sentiment, shed 19 percent - the biggest one-day drop in 19 months in a further sign of calm returning, at least for now.
"An easing of geopolitical tensions in Ukraine has aided investor sentiment. The potential for further talks and a possible ceasefire appears to remain," Hargreaves Lansdown equity analyst Keith Bowman said.
Russia's foreign minister said on Monday that objections to Russia sending a humanitarian convoy to Ukraine had been resolved during talks between Russia, Germany, France and Ukraine in Berlin on ways to end the conflict.
He said there had been no progress towards a ceasefire between the government and rebel forces in east Ukraine.
Lee Armitage, senior trader at Accendo Markets, said that sentiment improved on signs that the conflict may not escalate in the near term after both the parties had talks, with Germany and France acting as mediators.
However, some traders said they maintained a cautious approach, mindful of Friday's market swing which saw a near 1 percent rise on the UK benchmark wiped out.
"We are not overly confident that a rally will be sustained. Geopolitical risks at the moment are just too high," said Mark Ward, head of trading at Sanlam Securities. "We will be looking to sell into the strength."
Among big movers, chip designer ARM Holdings rose 2.6 percent as Goldman Sachs added to some recent positive broker comment on ARM, which sells blueprints for chip designs and receives royalties on every chip shipped by partners.
The investment bank repeated its "buy" rating on the stock, which it added to its "Conviction List" ahead of what it expected to be a better second half for the company.
"We see the smartphone inventory correction as substantially resolved, and expect high-end smartphone launches incorporating ARM v8 designs to benefit royalties," it said in a note.
Some mid-cap firms also rose, including housebuilder Bovis Homes, which jumped 4.5 percent as investors welcomed its enhanced dividend policy, while a record number of completions boosted its first-half results.
The Thomson Reuters UK Homebuilding index jumped 7 percent last week, bolstered by weak UK wage growth data, which prompted the market to push back its expectations for when the Bank of England would lift interest rates. The index was up 1.5 percent on Monday. (Additional reporting by Tricia Wright; Editing by Ralph Boulton)