China will stick with the policies that cooled economic growth last quarter and will keep faith with the euro despite Europe's debt problems, Premier Wen Jiabao said on Friday.

At a joint news conference with visiting German Chancellor Angela Merkel, Wen said the world's third-largest economy was trending in the direction that the government wanted.

We will maintain policy continuity and stability and continue to put into effect a proactive fiscal policy and an appropriately loose monetary policy, Wen said.

He was speaking a day after China reported a moderation in annual gross domestic product growth to 10.3 percent in the second quarter from 11.9 percent in the first three months of the year.

The premier attributed the slowdown to a high base of comparison in 2009 and to his government's macro-economic controls, which include steps to limit lending to property developers, home buyers and indebted local governments.

Policymakers would strive to implement the controls more flexibly and to target them better, Wen said.

Generally speaking, we must maintain steady and relatively fast economic growth and further increase the driving force of domestic demand in the economic recovery, he said.

Wen also offered his support to the euro zone, which is battling to regain investor confidence after Greece had to be bailed out in April by the single currency bloc, fanning fears about other heavily indebted European governments.

I want to say that at this time, when some European countries are suffering sovereign debt crises, China has always held out a helping hand, he said.

China supports the economic stabilization efforts of European governments and hopes they will succeed in nursing their public finances back to normal as soon as possible, the premier added.

We believe that with the joint hard work of the international community, Europe will certainly overcome its difficulties, he said.

China is a responsible, long-term investor that has always pursued the principle of diversifying its investments, Wen said.

The European market has been in the past, is now and will be in the future one of the main investment markets for China's foreign exchange reserves, he said.

Merkel welcomed Wen's support. It's an important signal that China, too, has made it clear that it has confidence in the euro, she said.

China does not disclose the currency composition of its $2.45 trillion stockpile of reserves, the world's largest, but bankers assume that perhaps two-thirds is invested in dollars with a big chunk of the remainder parked in euros.

Chinese and Greek companies signed shipbuilding and construction deals worth hundreds of million of euros last month, with the possibility of further deals to follow to help Greece overcome its debt crisis.

(Reporting by Ben Blanchard and Andreas Rinke; Editing by Alan Wheatley)

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