* This content was produced in Russia where the law restricts coverage of Russian military operations in Ukraine

MOSCOW, April 3 (Reuters) - Shares in Russia's top banks rose on Wednesday after Prime Minister Mikhail Mishustin proposed that their dividends could be used as a means of redistributing soaring banking profits to Russia's federal budget.

The banking sector made record profits of 3.3 trillion roubles ($35.77 billion) last year, driven by sharp rises in mortgage, consumer and corporate lending as the sector rebounded from a sanctions-induced slump in 2022. Profits are expected to decline slightly in 2024.

"On taxes on banks, in principle it is clear that if there is some big margin ... we need to look closely about how to deal with this fairly," Mishustin said in an annual report to parliament on Wednesday. "But there is such a mechanism - banks' dividends.

"Our banks are mostly state-owned and here we should carefully think about how to do this most fairly," he said. "Since it is not quite clear if we will change something drastically."

Shares in dominant lender Sberbank were 2.1% higher by 1455 GMT, outperforming the wider MOEX index, which was trading at a more than two-year high. Shares in No. 2 bank VTB rose sharply before paring gains to trade 0.7% higher.

VTB is still recovering from a sanctions-induced 2022 loss and has said it will be able to resume paying dividends in 2026. CEO Andrei Kostin said it may even be ready to pay dividends on its 2024 full-year results.

Mishustin also said the government was working on tax reforms to reduce social inequality. ($1 = 92.2560 roubles) (Reporting by Elena Fabrichnaya; Writing by Alexander Marrow; editing by Devika Syamnath)