By Atul Prakash

LONDON (Reuters) - The top share index closed higher on Monday as banking stocks recovered on a U.S. plan to rescue ailing mortgage finance companies while Kazakhmys (KAZ.L: Quote, Profile, Research) lifted the mining sector after it said it was in merger talks.

Banks also gained after Spain's Santander (SAN.MC: Quote, Profile, Research) said it had reached a deal to buy Alliance & Leicester ALLL.L, sending the midcap soaring more than 50 percent.

The commodity-heavy FTSE 100 .FTSE closed up 38.8 points, or 0.7 percent, at 5,300.4, paring gains after rising as much as 2.1 percent in the session. The index had fallen 2.7 percent on Friday to its lowest closing level in nearly three years.

Sentiment in the banking sector slightly improved after a U.S. government plan, announced on Sunday, to shore up mortgage finance firms Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research).

The plan called for sweeping measures to lend money and buy equity if necessary in the government-sponsored enterprises, which own or guarantee $5 trillion in debt -- close to half the value of all U.S. mortgages.

"They are pretty positive measures and we could see some support for the banks and the downward move starting to slow down as well," said Manoj Ladwa, a derivatives trader at TradIndex, referring to the U.S. government's plan.

"But what concerns investors primarily is that there could be more in the way of writedowns. I don't think (the FTSE's rise) is sustainable. We are in a bear market and this seems to be one of those rallies you typically see within a downward trend."

Standard Chartered (STAN.L: Quote, Profile, Research), Barclays (BARC.L: Quote, Profile, Research), Lloyds TSB (LLOY.L: Quote, Profile, Research) and HBOS HBOS.L rose 0.8 to 2.8 percent, while recently battered Bradford & Bingley BB.L jumped 12 percent, helped by the Alliance & Leicester deal.