JERUSALEM, Aug 16 (Reuters) - Israel Discount Bank reported a higher-than-expected gain in quarterly profit as the country's economy continued to recover from the coronavirus crisis, allowing it to gradually unwind large loan default provisions made last year.

Israel's fourth-largest bank by assets said on Monday it earned 860 million shekels ($267.5 million) in the second quarter, compared with 174 million a year earlier and above a forecast of 651 million shekels in a Reuters poll of analysts.

Discount posted income for credit losses of 410 million shekels, up from 147 million shekels in the first quarter, when a successful vaccination campaign allowed Israel to begin to emerge from lockdowns, and versus second quarter 2020 credit loss expenses of 532 million shekels.

Net interest income grew 15.2% to 1.69 billion shekels from a year earlier.

Discount said it planned to resume a 20% dividend payment on ongoing profits when the country's banking regulator lifts restrictions on payouts, presuming no further limitations will be set.

The ban on dividends, which came at the outset of the pandemic, is set to expire at the end of September, although it could be extended.

On the back of improved capital ratios, the Bank of Israel has allowed one-time dividends of up to 30% of 2020 net profit.

Larger rivals Hapoalim and Leumi have announced plans to pay a special dividend but Discount has so far opted against one.

Discount's gross credit balance surpassed 200 billion shekels for the first time, driven mainly by its core banking business and with loan book growth of 8.3% over the past year.

Its Tier 1 capital ratio rose to 10.28% at the end of June from 10.08% at the end of the second quarter of 2020. ($1 = 3.2149 shekels) (Reporting by Steven Scheer; Editing by Kirsten Donovan)