* FTSE 100 flat
* RBS jumps 14 pct as UK upturn boosts results
* GSK pegs back FTSE on corruption allegations
By Francesco Canepa
LONDON, July 25 (Reuters) - British lenders who focus on the domestic market outpaced a flat FTSE 100 index on Friday after strong results from Royal Bank of Scotland and solid economic output data.
Shares in RBS surged 13.9 percent, on track for their biggest rise in four years, after the bank posted a surprise pretax profit for the second quarter, citing an economic upturn that allowed it to write back losses that had been booked on bad loans.
Fellow UK-focused lenders Barclays and Lloyds Banking Group were up around 2 percent.
The positive mood on the British economy was underpinned by data showing the country’s economic output has grown to be bigger than it was before the financial crisis struck six years ago.
“The UK is having the best of time,” said Gerard Lane, a strategist at Shore Capital.
“The credit backdrop is better for the UK domestic banking sector and, alongside their very strong profitability levels, one would expect the banks to perform quite well.”
Lane said he expected the pace of economic growth in Britain to slow versus the rest of the world next year, however, owing to a tighter monetary policy by the bank of England and lower public spending after the general elections.
Financial shares added nearly 14 points to the FTSE 100 , which was up 1.36 points at 6,822.82 points at 1001 GMT - flat one the day but on track for a 1 percent gain for the week.
Among other gainers that focus on the domestic market was British grocer J Sainsbury, with traders citing a Daily Mail report of fresh bid interest from Qatari investors. The company declined to comment.
Network operator Vodafone added a further 5 points the FTSE as it rose 2.4 percent after saying its performance had begun to stabilise in several European markets.
Pegging back the FTSE on Friday were export-oriented such as heavyweight drugs firm GlaxoSmithKline and fashion brand Burberry.
GSK knocked 4.7 points off the index as it faced new allegations of corruption, this time in Syria, where the drugmaker and its distributor have been accused of paying bribes to secure business, according to a whistleblower’s email.
Burberry fell 1.9 percent after French luxury goods group LVMH posted below-forecast second-quarter sales and profits, hit by a drop in demand from China.
BSkyB was the heaviest faller on the FTSE, sliding 4 percent, after the company agreed to pay 4.9 billion pounds ($8.3 billion) in cash to buy Rupert Murdoch’s pay-TV assets in Germany and Italy, partly financing the deal by the placing of BSkyB shares.
Among mid-caps, shares in two of Britain’s biggest construction companies, Balfour Beatty and Carillion , rallied around 10 percent after they confirmed that they were in early talks on a possible 3 billion pound ($5 billion) merger. (Additional reporting by Lionel Laurent; Editing by Hugh Lawson)