JERUSALEM, March 1 (Reuters) - Mizrahi Tefahot, Israel's third-largest bank, said on Tuesday it was renewing regular dividend payouts, as it reported a 34% rise in quarterly net profit amid a continued unwinding of provisions to protect against loan defaults during the COVID-19 pandemic.

Mizrahi said it would distribute a dividend of 271.6 million shekels ($85 million) in mid-March to reflect a payout of 40% of fourth-quarter net profit.

Israel's banking regulator in December cancelled a temporary directive issued at the outset of the COVID-19 pandemic on banning regular dividends to ensure banks had sufficient credit to lend to businesses during the pandemic.

But banks were given permission to pay special dividends in 2021. Mizrahi distributed two dividends totalling more than 1.2 billion shekels last year, or 30% of net profit.

In the October-December period, Mizrahi - the first of Israel's banks to report quarterly results - said it earned 679 million shekels, up from 506 million a year earlier. It recorded income from credit loss provisions of 15 million shekels versus an expense of 118 million in the fourth quarter of 2020.

Net interest income rose to 1.96 billion shekels from 1.69 billion.

For all of 2021, net profit doubled to a record 3.2 billion shekels, partly boosted by the acquisition of smaller rival Union Bank in 2020 and loan growth of 10.6%.

"The decrease in morbidity and success of the vaccination campaign brought a positive turn, and since early 2021 we saw rapid recovery in economic activity and in the business sector," said Moshe Lari, Mizrahi's chief executive, referring to Israel's economic growth of 8.1% in 2021.

He added that the integration of Union Bank would be accelerated with the intention of concluding the process by end of 2022.

Mizrahi, Israel's largest mortgage lender with a 37% market share, said residential mortgages grew sharply to 116 billion shekels.

Mizrahi's Tier 1 ratio of capital to risk components, a key measure of financial strength, was unchanged at 10.04% in 2021.

Its shares were 3.4% lower in late morning trade in Tel Aviv, compared with losses of 1% on the broader bourse.

($1 = 3.2052 shekels) (Reporting by Steven Scheer; editing by Jason Neely and Louise Heavens)