LONDON, June 13 (Reuters) - Britain's opposition Labour party, which is predicted to win a July 4 election, on Thursday unveiled a manifesto pledging to keep spending tight, control sky-high debt, boost homebuilding and upgrade crumbling infrastructure.

UK stocks and sterling have rallied ahead of the vote as traders see Britain being steadied by a strong-majority Labour administration after Brexit, successive Conservative leadership changes and a 2022 mini-Budget that rocked the markets.

Some investors foresee a post-election market slump, however, doubting whether Labour can fulfill its promises while meeting interest costs on Britain's roughly 2.7 trillion pound ($3.5 trillion) debt pile and as the economy stagnates. "We see an awful lot of opportunity in the UK," Premier Miton CIO Neil Birrell said, because domestically focused small and midsize companies were undervalued.

"But given the economic conditions we are in and the state of the public finances there isn't an awful lot (Labour) can do to boost the economy."

Here's a look at what Labour's plans could mean for markets.

UK stocks have risen almost 6% this year as traders backed a Labour agenda that J.P. Morgan analysts deem positive for UK growth.

Banks and housebuilders have been the early winners of pre-election market optimism although both sectors fell on Thursday and the domestically focused FTSE 250 dropped 1%. Sterling, however, held near this week's 22-month high against the euro.

"Labour has been particularly careful not to do anything that looks rash," AJ Bell investment director Russ Mould said.

Labour leader Keir Starmer promised not to raise workers' taxes, to cap corporation tax at current levels and raise 8.6 billion pounds from a combination of oil and gas levies and anti-tax-avoidance measures targeting private equity and non-domiciled individuals.

Institutional investors were concerned about future tax rises on dividends, Premier Miton's Birrell said, although the corporation tax cap was "really good news."

Some economists see further modest tax rises ahead to support public services and investment because the next government will inherit a Treasury with empty coffers.

"The next chancellor's fiscal headroom based on the current fiscal framework has likely been depleted, if not (entering) marginal negative territory," said Deutsche Bank senior economist Sanjay Raja.

Institute for Fiscal Studies director Paul Johnson said that if economic growth was not surprisingly strong, Labour would need to cut public services, "fudge" fiscal targets or raise taxes.

GILT-Y PLEASURES

Labour's manifesto confirmed market expectations that UK debt as a share of GDP would start falling in five years' time, providing support for UK government bonds, known as gilts.

Gilts are among the worst performing developed bond markets this year. But 10-year gilt yields have dropped 17 basis points (bps) so far this month to around 4.15%, set for its best month since March as bond prices rise.

Investors expect stronger governance and market stability after former premier Liz Truss' mini-Budget pummeled gilts and sterling, while driving mortgage rates almost 200 bps higher.

"The UK is a safe, liquid developed market but we've had a few episodes in the past where it has traded like an emerging market," said Lombard Odier macro strategist Bill Papadakis, who is positive on gilts and UK stocks.

A strong Labour majority would make markets view the UK as predictable, reducing the risk premium on UK assets, he added.

The UK/German 10-year bond yield gap, a measure of the perceived risk of lending to the British government, is close to its lowest in 2024 at around 160 bps.

'NOT BIDENOMICS'

Labour's manifesto pledged planning reforms that it said would lead to construction of 1.5 million new homes and "boost growth everywhere" under tough spending rules. Plans to improve roads and rail services were described as a "10 year-infrastructure strategy."

"This will not be Bidenomics," Institute for Government (IFG) senior fellow Giles Wilkes added, referring to U.S. President Joe Biden's lavish economic stimulus.

Polar Capital UK fund manager Georgina Hamilton said Labour "can't use the public purse as much as they would like to fund public infrastructure."

Wilkes added that looser planning rules would not guarantee a wave of new housebuilding in an economy constrained by high mortgage rates and a worker shortage.

($1 = 0.7842 pounds)

(Reporting by Naomi Rovnick; additional reporting by Marc Jones; editing by Dhara Ranasinghe and Hugh Lawson)