* Banks had underperformed in initial reaction to budget
* Saudi Electricity rises on power tariff hopes
* Much activity focuses on smaller stocks
* Drop by DXB Entertainments dampens Dubai
* Egypt index closes flat but trade is heavy
By Andrew Torchia
DUBAI, Dec 27 (Reuters) - Banking shares boosted Saudi Arabia's stock index on Tuesday to its highest level this year, while other Gulf markets moved little in quiet trade with some foreign investors absent for New Year holidays.
The Saudi index closed up 1.3 percent at 7,257 points in its highest trading volume for two weeks, rising above technical resistance at this year's previous peak of 7,235 points hit in early December.
The banking sector surged 1.8 percent as the biggest lender, National Commercial Bank, climbed 2.1 percent. Banks underperformed the market in the initial reaction to the 2017 state budget at the start of this week, when activity focused on other sectors including petrochemicals.
The budget was generally viewed as positive by analysts because it was modestly expansionary while including a further cut to the deficit. But the economic climate next year is expected to be difficult because of fresh austerity measures.
Saudi Electricity, which has been buoyed by plans in the budget to raise power tariffs later this year, rose 1.8 percent.
Much activity focused on second- or third-tier stocks favoured by local retail investors, including Tihama Advertising which jumped its 10 percent daily limit. It resumed trading this week after being suspended because it delayed announcing its financial results.
Dubai's index fell 0.3 percent as DXB Entertainments pulled back 1.5 percent. Abu Dhabi rose 0.3 percent on the back of a 0.9 percent gain by Abu Dhabi Commercial Bank.
Egypt's blue-chip index closed flat in heavy trading volume, with foreign investors net buyers by a small margin.
Egypt Gas Co surged 5.3 percent after it predicted lower net profit but higher revenues in 2017.
* The index rose 1.3 percent to 7,257 points.
* The index fell 0.3 percent to 3,542 points.
* The index rose 0.3 percent to 4,469 points.
* The index fell 0.4 percent to 10,305 points.
* The index was flat at 12,182 points.
* The index rose 0.5 percent to 5,745 points.
* The index gained 0.6 percent to 5,761 points.
* The index rose 0.3 percent to 1,211 points.
Editing by Hugh Lawson and John Stonestreet