European finance ministers sought to calm nervous financial markets on Monday by nailing down details of a massive financial safety net for the euro zone and working toward stricter budget discipline rules.

EU paymaster Germany was putting finishing touches to tough austerity measures designed to set an example to Europe in budget consolidation and help restore market confidence.

Ministers from the 16 nations that share the single currency were due to rubber-stamp arrangements to allow a Special Purpose Vehicle to raise up to 440 billion euros to lend to euro zone nations that run into Greek-style payments problems, officials said.

I am confident we will have an agreement today on the SPV, European Economic and Monetary Affairs Commissioner Olli Rehn told reporters on arriving for the meeting.

He said ministers would also discuss the fiscal exit strategy (from economic stimulus measures) because it is evident that many countries need to accelerate fiscal consolidation.

They were also due to discuss ways of avoiding another Greek debt crisis by tightening surveillance of national budgets and introducing earlier and tougher sanctions against countries that breach EU deficit limits or misrepresent their statistics.

Investors fled peripheral euro zone government stocks and bonds last week on doubts about how the euro rescue mechanism would work and worries about the solvency of European banks exposed to the sovereign debt crisis.

Concern about political stability in Spain, the biggest of the troubled southern euro zone economies, and loose talk by Hungary's new conservative rulers of a possible Greek-style crisis in the central European country stoked market anxiety.

Spain's 5-year government bond yield was back near the 3.91 percent peak it hit immediately before the euro zone's May 13 deal on a $1 trillion backstop arrangement for the single currency area and before the European Central Bank began buying government bonds.

EURO WEAK

Hungary's new government was still striving to row back on the comments last week by ruling party officials, though its pledge of budget cuts to meet IMF deficit targets this year did little to help the euro.

The single currency traded close to its lowest level in 4 years below $1.20 after plunging last Friday partly in reaction to comments from French Prime Minister Francois Fillon welcoming the single currency's weakening against the dollar.

Rehn said he agreed with Jean-Claude Juncker, chairman of the Eurogroup of euro zone finance ministers, that is the pace of evolution (of the exchange rate) and not the level that is of concern.

ECB President Jean-Claude Trichet said on Saturday that European authorities were close to completing new stress tests on the banking system and would make appropriate communication once that was done.

However, it was not clear whether this would involve testing individual banks and recommending which ones need fresh capital as advocated by U.S. Treasury Secretary Timothy Geithner in a letter to G20 colleagues published at the weekend.

The euro zone ministers regular monthly meeting has taken on extra significance because of the market turmoil and pressure from Germany, the biggest European economy, for sharp public spending cuts to clean up debt-laden public finances.

Chancellor Angela Merkel's cabinet was finalizing a deficit cutting package expected to include big cuts in defense and social spending, as well as revenue-enhancing measures.

A coalition source said Berlin planned to cut energy tax breaks by 1 billion euros next year to help consolidate the budget, and save a further 1.5 billion euros a year on energy subsidies between 2012 and 2014.

However, it will not increase income tax or value added tax.

Germany resisted U.S. pressure at the G20 meeting in Busan, South Korea, to stimulate domestic demand to help drive global economic recovery and reduce its current account surplus.

Merkel and French President Nicolas Sarkozy aimed to patch up recent differences over the euro zone and financial regulation at a private Berlin dinner, 10 days before a crucial EU summit on reforming the bloc's economic governance.

Sarkozy has refrained from public criticism of Merkel during the Greek crisis, although French officials have been privately critical of her procrastination, which they contend increased the cost of the Greek bailout.

Although Hungary is not in the euro zone, the risk of financial turmoil in wider EU countries is one of the factors weighing on confidence in the euro and in euro zone banks which have substantial exposure to central and eastern Europe.

Asked whether Hungary also faced a Greek-style meltdown, the EU's Rehn replied: No.

(additional reporting by Krisztina Than in Budapest, Sarah Marsh in Berlin, George Matlock in London; writing by Paul Taylor; editing by Patrick Graham)

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