* Banks rally more than eight percent
* Nedbank urges Ramaphosa to protect sovereign rating
* JP Morgan raises 2018 economic growth forecasts
* Worries about policy paralysis weigh on rand currency (Adds Fitch)
JOHANNESBURG, Dec 19 (Reuters) - South African banking stocks rallied on Tuesday, buoyed by optimism that the newly elected leader of the ruling African National Congress will push through policies aimed at putting the economy on a stronger footing.
The ANC's electoral dominance means Cyril Ramaphosa, a 65-year-old union leader turned businessman who is South Africa's deputy president and one of its richest people, is likely to become the next president after elections in 2019.
He narrowly won the leadership on promises to fight rampant corruption and revitalise the economy - a message hailed by foreign investors who have turned away from South Africa during Jacob Zuma's scandal-plagued presidency.
Credit ratings agency Moody's said Ramaphosa's rise opened up the prospect of a policy shift and rise in business confidence that "could reverse the gradual deterioration in South Africa's credit fundamentals".
Fitch, however, warned that Ramaphosa's slim victory meant economic and fiscal policy uncertainty may remain high in 2018.
"The division of the party chairmanship and the national presidency could increase inefficiencies in policy making if there is a period of 'cohabitation"', it said in a statement.
Ramaphosa's victory over former cabinet minister Nkosazana Dlamini-Zuma is seen as a pivotal moment for the ANC, which launched black-majority rule under Nelson Mandela's leadership 23 years ago but is now deeply divided with its image tarnished.
Ramaphosa, a former chairman of Africa's biggest telecoms operator MTN Group, is seen by business leaders as well placed to turn around the economy. South Africa's GDP is estimated to grow by less than one percent this year, while the unemployment rate is nearly at a record 28 percent.
In an open letter, Mike Brown, chief executive of the country's fourth-largest bank, Nedbank, urged Ramaphosa to immediately address governance failures in state-owned companies and ensure that South Africa retains its last investment-grade rating, from Moody's.
"It is important that we have stable and rational policies, creating an environment that encourages growth for businesses and individuals," Brown said.
Ramaphosa's edging out of Dlamini-Zuma, the president's favoured candidate and ex-wife, in Monday's leadership vote put shares in banks, considered a barometer of economic and political sentiment, back in demand.
In afternoon trade, the blue-chip stock index, the JSE Top-40, rose 0.47 percent to 51,266 with banks among the top of the gainers' list. The banking index rose more than 8 percent, with Barclays Africa surging nearly 12 percent.
Government bonds firmed, with the yield on the benchmark due in 2026 falling 19 basis points to 8.665 percent.
A local business lobby group, Business Leadership South Africa, welcomed Ramaphosa's election, saying it gave him a chance to address inequality, unemployment and poverty.
"For this to happen, we require regulatory certainty and policy stability that will accelerate and deepen transformation," said BLSA, which is composed of some of the biggest and most influential names in corporate South Africa.
Another key issue facing the ANC's new leader is policy uncertainty in South Africa's mining industry, where companies are challenging a requirement to increase black ownership of firms in the sector to 30 percent from 26 percent.
Mining is a major employer and contributed 7.7 percent to gross domestic product in 2016. The sector also accounts for 25 percent of exports in Africa's most industrialized economy.
Analysts at U.S. bank JP Morgan raised their economic growth forecast for next year to 1.4 percent from one percent, prompted by Ramaphosa's election.
"The forecast change largely rests on a lesser purchasing power drag on consumers, as outlined below, and perhaps a modest resumption in the capex cycle," the analysts said in a note.
The rand currency retreated on Tuesday from a nine-month high notched up in the previous session. At 1504 GMT, the rand was 0.14 percent firmer against the dollar at 12.7525 rand.
Expectations that Ramaphosa would win the ANC race had pushed the rand to 12.5200 per dollar on Monday, its firmest since March 27 before a cabinet reshuffle by Zuma rocked markets and triggered credit ratings downgrades to "junk".
Ramaphosa will be the ANC's flag-bearer in the 2019 national election, but will have to contend with allies of his defeated rival, Dlamini-Zuma, in his leadership team.
He said the leadership would be effective as it combined different views and approaches to deal with issues.
Some investors were worried that Ramaphosa may not be able to push through policy changes because the ANC's top decision making group, known as the "Top Six", was split down the middle, consisting of three politicians apiece drawn from Ramaphosa and Dlamini-Zuma's camps.
Dlamini-Zuma is a veteran campaigner against the racial economic inequality that has persisted since the end of white-minority rule and her hostility to big business had rattled some investors in South Africa.
"There is some concern that the split of the ANC top six (officials) might hinder Cyril Ramaphosa's ability to invoke the much needed reforms he has been campaigning on," said Shaun Murison, currency strategist at IG Markets. (Editing by James Macharia and Larry King)