* FTSE closes flat at 6,605.30 points
* FTSE falls below 50-day moving average level
* Lloyds drops 4.9 pct, takes most points off FTSE
* Standard Life surges 7 pct on Ignis deal
By Sudip Kar-Gupta
LONDON, March 26 (Reuters) - Shares in British bank Lloyds plunged 4.9 percent on Wednesday after the government sold a stake in the lender at a discount to its stock price, and held back the UK's blue chip equity index.
The FTSE 100 index, which at one stage rose as much as 0.6 percent, ended up by just 0.41 points, flat in percentage terms, at 6,605.30 points.
The weakness at Lloyds, after the British government sold a 4.2 billion pound ($7 billion) stake in the bank at a 4.6 percent discount to Lloyds' closing share price on Tuesday, took the most points off the FTSE 100.
Simon Gergel, UK equities portfolio manager at Allianz Global Investors, said Lloyds' growth potential looked weak compared to rival HSBC, which is more exposed to fast-growing Asian economies.
"The growth prospects for Lloyds in the UK are limited as the economy is mature and we believe that low interest rates and high levels of consumer and government debt will restrain economic growth and the demand for further credit," said Gergel.
Traders said the FTSE 100's drop below its 50-day moving average - which stands at around 6,637 points - had also caused the index to give up its earlier gains.
Traders often use an index's slide below the 50-day moving average as a sign of further near-term weakness to come, and a cue to sell.
Lloyds' decline overshadowed a recovery in insurance stocks.
The insurance sector fell sharply last week after the British government scrapped a requirement that pensions savings should be used to buy an annuity, dealing a potential blow to insurers' future profits.
However, the sector recovered on Wednesday, led by Standard Life which surged 7 percent to top the FTSE's leaderboard on the company's takeover of Ignis Asset Management.
"The insurers got hit last week by the new pension arrangements, but we're now seeing them recover. The Ignis deal does help Standard Life strengthen its grip on the UK market," said Edmund Shing, global equity fund manager at BCS Asset Management.
Although many investors expect the FTSE to hit a record high of 7,000 points later this year, Logic Investments' director Darren Easton felt near-term gains for the index were limited.
The FTSE, which rose 14.4 percent in 2013 to post its best annual gain since 2009, has failed to break above the 6,900 point level so far this year and is down by around 2 percent since the start of 2014.
Easton said he had bought positions in the FTSE for clients last week at the 6,560-point level but had started to trim back those holdings at the 6,640 level.
"We're not saying we're not going to go any higher, but we're just reducing our risk on the upside," he said. ($1 = 0.6037 British pounds) (Additional reporting by Francesco Canepa; Editing by Sonya Hepinstall and Susan Fenton)