* Guarantee rises to 85,000 sterling from 50,000 sterling - FSA
* Matches new European 100,000 euro guarantee - FSA
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LONDON, Dec 17 (Reuters) - Britain will raise its state guarantee on bank deposits to 85,000 pounds ($132,800) at the end of the year, bringing it into line with a new European compensation limit, the country's financial regulator said.
The new guarantee, up from 50,000 pounds per person currently, takes effect from Dec 31, the Financial Services Authority said on Friday.
The higher limit matches a new 100,000 euro ($133,100) compensation ceiling that comes into force on the same date across the European Economic Area, which covers most of Europe.
"The need to maintain customer confidence in the banking system is one of the key lessons from the financial crisis," FSA Director of Conduct Policy Sheila Nicoll said in a statement.
She added that the new guarantee would protect "the vast majority of depositors."
Britain raised its deposit guarantee from 35,000 pounds per person at the height of the banking crisis two years ago after the near-collapse of Northern Rock prompted thousands of savers to withdraw their cash from the troubled bank.
The FSA added that the majority of claimants under the new scheme would get their money back within 7 days in the event of a bank failure, and all would be compensated within 7 days.
Claimants would also be repaid their bank deposits in full, in contrast to the current approach, where deposits are repaid minus any outstanding loans held with the same institution. ($1=.6400 Pound) ($1=.7513 Euro) (Reporting by Myles Neligan; Editing by Sudip Kar-Gupta)