Forex - Merkel, EU partners in tug-of-war over Greek aid

* Merkel says no need for EU summit to discuss Greek aid
* Greek PM says EU needs mechanism to deter speculators
* Juncker sees possible twin-track euro zone/IMF support
* Trichet says any help would have to be conditional loan
* Euro falls, Greek risk premium leaps amid uncertainty (Recasts with Merkel, Papandreou comments)

By Matthias Sobolewski and Harry Papachristou

BERLIN/ATHENS, March 22 (Reuters) - Germany and its European Union partners clashed on Monday over financial support for debt-stricken Greece, with Chancellor Angela Merkel continuing to rebuff calls for a euro zone agreement this week.

European Commission President Jose Manuel Barroso challenged Merkel to rise above domestic politics and agree on a financial safety net for Athens or risk harm to their common currency, noting the euro's stability was in Germany's interest.

Merkel, facing fierce opposition in Germany to any bailout, said there was no need to discuss an aid mechanism at an EU summit starting on Thursday since Athens had not sought help and it could only be a last resort in case of imminent insolvency.

Therefore we don't have to discuss emergency aid, the German chancellor said.

Greek Prime Minister George Papandreou told parliament he was not seeking money but a period of calm to implement reforms.

It would be very useful if it was obvious the EU has a mighty, loaded gun on the table capable of preventing speculators and speculation, something which is beyond our powers, the powers of an economy our size, Papandreou said.

Behind the scenes, EU diplomats said tough negotiations were under way among Germany, its main EU partners and the European Commission on a support mechanism, possibly in tandem with the International Monetary Fund.

European Council President Herman van Rompuy was trying to broker a pre-summit deal to save Merkel's face, they said.

Meanwhile, each side sought to raise pressure on the other with public comments as the summit approaches.

Greece's outspoken deputy prime minister accused Berlin of allowing its banks to take part in a deplorable game of speculating on Greek bonds while German exporters profited from a weaker euro due to Athens' budget problems.

Barroso told a German newspaper: We can't carry on as we are, as this would threaten the stability of the euro zone and encourage speculation. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Europe's fight with debt [ID:nLDE6211JD] Graphic on euro zone debt crisis on Greece and EU standoff [ID:nLDE62H0W2] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Underscoring his warning, the euro slipped to a three-week low against the dollar on Monday as investors fretted over the uncertain prospect of support for Greece. [nLDE62L0YO]

The premium on Greek debt jumped to its highest since March 1 and the cost of insuring Greek debt against default also rose.

In Athens, Deputy Prime Minister Theodoros Pangalos told a conference that unless a decision was taken quickly, then the euro will make no sense and decades of European integration could unravel. [nATH005301]

VICIOUS CIRCLE

European Central Bank governing council member Axel Weber said euro zone countries that had lived beyond their means such as Greece, Italy, Spain and Portugal must knuckle down to tough economic reforms.

More profound and far-reaching changes have to be undertaken in countries that have lived beyond their means and thereby driven divergences within the euro area, the head of the German Bundesbank said in a speech in Copenhagen.

ECB President Jean-Claude Trichet told the European Parliament that any help for Greece should take the form of a loan with very stringent conditions, not a subsidised soft loan.

Officials in other EU capitals questioned whether Merkel, fighting to win a key regional election in May in which her centre-right coalition's upper house majority is at stake, would choose European responsibility over domestic popularity.

An FT/Harris poll in Monday's Financial Times showed 62 percent of Germans oppose their government helping Greece with its budget deficit, while only 20 percent are in favour.

One-third of Germans think Greece should be asked to leave the euro, while 40 percent believe Germany would be better off outside the currency bloc.

Any financial support for Athens would likely be challenged in the German Constitutional Court, which set strict conditions barring transfers to other states in the monetary union.

Given the daunting political and legal hurdles, Merkel aides have suggested Greece may have to turn to the International Monetary Fund if it needs help.

The chairman of the Eurogroup of finance ministers of the 16-nation single currency area, Jean-Claude Juncker, told the European Parliament a twin-track approach involving both the euro zone and the IMF was possible, based on European rules.

Greece is not on the verge of bankruptcy, he said. But I will say Greece will not be abandoned if we see Greece needs euro zone assistance. We will not abandon Greece. [nLDE62L1CQ]

Private economists say clarity is needed quickly to make Greek borrowing costs more manageable.

Unless there is a major change of heart in Berlin, it seems increasingly likely that Greece could be forced to turn to the IMF for assistance, said Ben May of Capital Economics. After all, the only way that bond yields will return to more normal levels is if Greece gets some kind of explicit assistance.

Barroso appealed to Germany's interests as the biggest economy in securing a stable single currency area, which is its number one export market.

Other euro zone states backed his call for an agreement this week. The foreign ministers of Italy, France and Austria called for a compromise before or at the summit.

The new head of Greece's PDMA debt agency last week revised down the amount that Athens needs to borrow by the end of May to 16 billion euros. Petros Christodoulou said 23 billion euros of Greek debt falls due from April 19 to May 23, but the government has a positive cash balance of around 7 billion euros.