FTSE closes at 3 week high, BA soars

* FTSE closes up 0.2 percent, retreats from 13 month high

* BA soars after board considers Iberia merger

* Gains muted by weakness in commodity stocks

* BT update sees telecoms rise

By Simon Falush

LONDON, Nov 12 (Reuters) - Britain's FTSE 100 hit its highest close in three weeks on Thursday as British Airways soared with investors cheered as a merger with Iberia looked imminent, while gains were also powered by strength in banks.

But the rise was limited by falls in commodity prices hitting miners and energy stocks, which together constitute a third of the index.

The index .FTSE closed up 9.75 points or 0.2 percent at 5,276.50, it's highest close since Oct 19, and touched a peak since September 2008 after ending 0.7 percent higher on Wednesday.

British Airways (BAY.L) rose 7.5 percent after it and Iberia (IBLA.MC) confirmed their boards were holding separate board meetings to consider a merger to create the world's third largest airline by revenue. [ID:nLC092017]

"There's rumbling M&A activity ... the BA deal looks close to fruition and results are looking fairly good with BT's cashflow higher than expected," said Grahame Exton, fund manager at Tilney Investment Management in Liverpool.

BT Group (BT.L) gained 3.7 percent after it increased its outlook for the full year after stringent cost cuts helped the former telecoms monopoly deliver strong core earnings. Free cashflow targets were lifted to at least 1.6 billion pounds. [ID:nLB181504]

Other telecoms stocks were also stronger, buoyed by improved sentiment on the sector after the BT Group results. Heavyweight Vodafone (VOD.L) added 1.3 percent and Cable & Wireless (CW.L) rose 1.4 percent.

The index is up 19 percent this year and has soared 52.5 percent since touching a six-year trough in March.

"Coming up to year end, a lot of people don't want to be seen holding too much cash and a lot of it is finding its way into the equity market," Exton at Tilney said.

Inmarsat (ISA.L) added 6.7 percent, benefiting as the satellite communications firm enetered the MSCI world index MIWD00000PUS meaning that some index tracking funds automatically take positions in the stock.