* FTSE 100 up 0.5 pct in mid-session trading

* Standard Life (LSE: SL.L – news) surges after Ignis AM deal

* Lloyds falls as UK government cuts stake

By Sudip Kar-Gupta

LONDON, March 26 (Reuters) – A rebound in blue chip insurance stocks, such as Standard Life and Legal & General, pushed Britain’s top equity index to its highest level in around two weeks on Wednesday.

The FTSE 100 index advanced by 0.5 percent, or 31.29 points, to 6,636.18 points in mid-session trading.

The insurance sector fell sharply last week after the British government in its budget scrapped a requirement that pensions savings should be used to buy an annuity, dealing a potential blow to insurers’ future profits.

However, Standard Life and L&G (LSE: LGEN.L – news) led a sector recovery on Wednesday as their shares rose on the back of business deals, with the two companies adding the most points to the FTSE 100.

Standard Life surged 6 percent to the top of the FTSE’s leaderboard after the company said it was acquiring Ignis Asset Management, while L&G rose 3.1 percent after winning a contract with the ICI Pension Fund.

“Insurers lead the charge today, with Legal & General and Standard Life looking to bounce back from the drubbing both received in the wake of the budget last week,” said IG (LSE: IGG.L – news) market analyst Chris Beauchamp.

“The news is proof, if any were needed, that the sector is not dead and buried despite the annuity changes,” he added.

A 4 percent fall in Lloyds Banking Group curbed the FTSE’s progress, after the British government sold a 4.2 billion pound stake in the bank at a 4.6 percent discount to Lloyds’ closing share price on Tuesday.

Although many traders and investors expect the FTSE to hit a record high of 7,000 points later this year, Logic Investments’ director Darren Easton felt the FTSE’s gains in the near term looked relatively 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. (Additional reporting by Francesco Canepa; Editing by Susan Fenton)