Dec 15 (Reuters) - U.S. bank stocks extended their rally before the bell on Friday, cheered by the prospect of higher loan growth and lower deposit costs after the Federal Reserve's dovish stance raised the chances of interest-rate cuts in early 2024.

Gains in large and regional bank shares helped the sector return to their highest level since early March when three mid-sized lenders collapsed due to liquidity crunch.

The KBW Regional Banking Index closed 4.15% higher in the previous session, while the S&P 500 Banks Index surged nearly 21% quarter-to-date, erasing losses with a 6.54% rise this year.

"With interest rates potentially moving lower in 2024, the tailwinds of stable to lower funding cost, borrower alleviation, and improving capital levels should be enough to get investors back," said analysts at brokerage Truist Securities.

The Fed's historic policy tightening campaign has been blamed in part for the March crisis when customers pulled deposits to chase the safety of larger 'too big to fail' institutions and better returns from money market funds.

"Lower rates also alleviate capital pressure for regional banks given collapsing unrealized losses on bond books," BofA Securities analysts wrote in an industry note on Thursday.

Western Alliance, Regions Financial, Keycorp , Citizens Financial and Truist Financial gained between 1% and 2.2% in premarket trading.

Though higher borrowing costs boost interest income for the big lenders, a broad recovery in investor sentiment and lower rates are expected to help dealmaking power profit at their investment banking units.

Shares of JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley were up between 0.3% and 1%. (Reporting by Manya Saini in Bengaluru; Editing by Arun Koyyur)