HSBC (>> HSBC Holdings plc) was up 3.1 percent after the Sunday Times reported that it was weighing plans to spin off its British retail bank in a 20-billion-pound ($30 billion) deal. HSBC declined to comment on the report.

The bank had already said it was reviewing whether to keep its headquarters in London, given increased regulation and the possibility of a referendum on Britain's membership in the European Union - an important issue in the May 7 election.

"HSBC investors are warming to reports that the UK-domiciled and London-listed bank is mulling a spin-off of its UK retail banking operations to ensure it remains flexible to any changes to the UK's membership in the EU," Will Hedden, a dealer at London Capital Group, said in a note.

Rival bank Standard Chartered (>> Standard Chartered PLC) also rose 4.3 percent.

The rise in HSBC added nearly 15 points to the FTSE 100 <.FTSE>, which was up 33.28 points, or 0.5 percent, at 7,103.98 points by the close. The index surged to a record 7,122.74 points, surpassing a previous high set earlier in the month.

However, the FTSE fell away towards the close after a poll put the ruling Conservatives six points ahead of the opposition Labour party, sending sterling to a seven-week high.

Markets historically tend to favour centre-right-leaning Conservative governments, although a rally in sterling makes the pound-denominated FTSE worth nominally less.

Illustrating investor concerns around the election, housebuilders such as Taylor Wimpey (>> Taylor Wimpey plc) and Barratt Development (>> Barratt Developments Plc) underperformed.

The Labour Party said on Sunday it would introduce rent controls if it won the election and ban private landlords from raising rents by more than the rate of inflation for the duration of new three-year contracts.

Traders said the proposals could weigh on the housing market, which in turn was contributing to the drop in housebuilder stocks, even though the party also said it would scrap stamp duty for first-time buyers.

"Nervousness over the election is finally starting to filter into the FTSE 100. Rent controls will affect the housing sector," said Atif Latif, director of trading at Guardian Stockbrokers.

The FTSE underperformed European shares, which were buoyed by hopes that a reshuffled negotiating team would help Greece reach a deal with its international lenders.

"We've been bouncing around 7,000-7,100 for two weeks now, but a strong finish today above 7,100, helped by the euro zone, would leave us well set for a break-out," said Chris Beauchamp, market analyst at IG.

"The market outlook remains clearer in the euro zone than in Britain, however."

(Editing by Mark Heinrich)

By Alistair Smout and Sudip Kar-Gupta