Britain's FTSE gains on some relief over Ukraine developments
* FTSE 100 index rises 0.6 percent
* FTSE 'fear gauge' set for biggest drop this year
* 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 headed towards a two-week high on Monday on traders' 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 hit a two-week high on Friday before erasing gains to end flat, was up 0.6 percent at 6,727.44 points by 1012 GMT.
The volatility index, a gauge of investor sentiment, shed 17.5 percent and was on track for its biggest one-day drop this year 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," Keith Bowman, equity analyst at Hargreaves Lansdown, 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. However, he also said there had been no progress toward a ceasefire between the government and rebel forces in east Ukraine.
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."
Charles Stanley technical analyst Bill McNamara said selling pressure was likely to kick in if the FTSE 100 pushes back above 6,800.
Among sharp movers, chip designer ARM Holdings rose 2.1 percent as Goldman Sachs added to some recent positive broker comment on the company, 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 ARM.
"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 companies also advanced, including housebuilder Bovis Homes, which jumped 5.1 percent as investors welcomed its enhanced dividend policy, while a record number of completions boosted the company's first-half results.
"The dividend yield argument is still quite powerful," Peel Hunt equity strategist Ian Williams said. "I think that's a theme that's got further to go really."
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 percent on Monday. (Additional reporting by Tricia Wright; Editing by Susan Fenton)