* BP reaches $7.8 bln deal with individuals, businesses
* Shares up 1.6 pct
* Analysts forecast rise above 5 percent (Updates with closing share price)
By Tom Bergin
LONDON, March 5 (Reuters) - Shares in BP rose less than some analysts expected on Monday after the oil giant reached a settlement with businesses and individuals affected by the Gulf of Mexico oil spill worth an estimated $7.8 billion.
Investors said the settlement was broadly in line with expectations and reduced legal uncertainty but outstanding legal risks still held back the stock.
"I would describe it as the end of the beginning of the legal battle, rather than getting too optimistic about it. But it is a step in the right direction," said Will Riley, fund manager at Guinness Asset Management.
The share rise also reflected the fact that BP's shares had risen recently on the hopes of a settlement, Paul Mumford, a fund manager at Cavendish Asset Management said.
The judge presiding over the trial to decide who was to blame for the rig blast that started the spill postponed the scheduled Feb. 27 commencement date, on the basis BP and the plaintiffs were near a settlement.
BP shares closed up 1.6 percent at 504.6 pence, outperforming a 0.3 percent drop in the STOXX Europe 600 oil and gas index.
In a series of bullish research notes on Monday, analysts had predicted BP's shares could rise over 5 percent on news of the deal, although none of the notes seen by Reuters actually carried upgrades in the ratings the analysts had on BP.
"On a trading basis we see a potentially quite positive reaction ... BP moving to the 530-550 pence range near term (if not higher), and possibly higher thereafter," said Jason Kenny, oil analyst at Santander, who raised his BP target price to 580 pence from 532 pence.
Some analysts said the deal with fishermen, condominium owners and hoteliers suggested the final settlement with BP's biggest opponent - the U.S. government - would be much lower than the worst case scenario.
"I think the settlement further weakens the government claim of gross negligence," said Fadel Gheit, oil analyst at Oppenheimer in New York.
BP has taken a $3.5 billion provision for expected government fines but the maximum possible level could be over $20 billion if BP is found to have been grossly negligent.
Some investors had feared BP's ability to grow its dividend -- the key reason for holding the stock for many investors -- could be limited by the legal uncertainty it faces.
But analysts at Morgan Stanley predicted the agreement would allow BP to continue raising its dividend, which was cut at the height of the worst oil spill in U.S. history.
"We believe the path towards free cash flow of $8.7 billion and a dividend of 39 cents per share by 2014 remains intact," the bank said in a research note.
BP paid a dividend of 29 cents per share for 2011.
BP's dividend yield -- the ratio between the share price and the stock price, a key metric for investors -- is well below that of rivals Royal Dutch Shell and France's Total .
In addition to the U.S. Federal government's claims, BP faces lawsuits from the states affected by the spill, which came after the rig blast that killed 11 men.
Analysts at Citigroup said they expected BP to have to pay another $1-2 billion to settle these claims. (Editing by Mark Potter and David Cowell)