Germany's top court began hearing legal challenges on Tuesday against last year's bailouts of debt-stricken euro zone peers in a move that could affect Berlin's room for maneuver in future rescue packages.

The Karlsruhe-based Federal Constitutional Court is unlikely to block Germany's contributions to bailouts, but legal experts expect it will probably set conditions for approving fresh aid under a permanent rescue scheme.

Finance Minister Wolfgang Schaeuble, defending the government, attended in person to tell the court that the euro currency area was at risk from struggling countries and that the bloc had to act to prevent such contagion risks.

The danger of such contagion ... justified the need to help Greece in April 2010 with coordinated bilateral loans, he said.

Ruling conservative politicians who spoke to Schaeuble later in Berlin said that following the hearing he was not skeptical about the outcome and expected a ruling by the end of September.

Germany is the bloc's economic powerhouse and foots over a quarter of Europe's bill for the bailouts. At a time when a second Greek rescue is being drawn up, many Germans are becoming fed up with financing rescues of what they see as profligate states that have spent beyond their means.

Presiding judge Andreas Vosskuhle said the court would not review the economics behind policies to tackle the euro zone's sovereign debt crisis but focus only on the legal basis.

Europe's future and the right economic strategy to tackle the sovereign debt crisis aren't debated in Karlsruhe. That's the task of politicians, not judges, Vosskuhle said. But the Federal Constitutional Court must consider the limits that the constitution sets on the political realm.

One of the plaintiffs, Karl Albrecht Schachtschneider, argued: What is wrong economically cannot be right legally.

POWER TO PARLIAMENT?

The court is considering three lawsuits brought by six euroskeptical plaintiffs -- five academics and a lawmaker from Chancellor Angela Merkel's Bavarian sister party -- against euro zone bailouts and aid paid to Greece, Ireland and Portugal.

Schachtschneider and his four academic co-plaintiffs tried unsuccessfully in the 1990s to have the constitutional court stop the introduction of the euro.

Most experts and government sources say they expect the court to give parliament a bigger say in approving future bailouts and the permanent rescue fund ESM that comes into force in 2013, potentially tying the government's hands. That makes its verdict key for the whole currency area.

The eight judges could require changes such as a mandatory parliamentary vote on requests for ESM funds, a condition not formally needed so far. Plaintiffs argued the lower house had been blackmailed into approving Greek aid quickly last year.

MPs (last May) had to decide along the lines of 'eat or die' within a few days and there was the threat of 'if you don't agree to this, Europe and the European idea will fail', said one plaintiff, Peter Gauweiler of the Christian Social Union.

It was presented as a choice with no alternative. That was not really the case, said Gauweiler. The CSU is the Bavarian sister party to Merkel's CDU in Germany's ruling coalition.

The hearing is being closely watched in Germany and the rest of the EU as legal experts have been able in the past to gauge the likely outcome of cases early on from the kinds of questions the judges asked. A verdict is expected in the autumn.

The pending case has also given Merkel a strong reason to take a tough line in euro zone negotiations, another reason why it is being observed with trepidation in European capitals.

LIKE BLOWING UP A BUILDING

Judges repeatedly asked plaintiffs to spell out explicitly how they contend the basic law was violated. Most of the morning session was taken up with arguments over whether the case was even admissible to this court.

The plaintiffs argue that multi-billion euro aid packages for Greece and other euro zone strugglers violate Germany's constitution and EU treaties and could end up turning the EU into a financial transfer union from richer to poorer states.

Rescuing the euro by destroying the fundamental norms of the currency's constitution is like repairing water damage by blowing up the building, said Dietrich Murswiek, Gauweiler's lawyer.

Together with the International Monetary Fund, the EU has since last year approved bailout packages for Greece, Ireland and Portugal totaling 273 billion euros ($395 billion). A second bailout of Greece is under discussion after the first one turned out to be insufficient.

Ahead of the hearing, Schaeuble said the government was certain that Germany's decision to commit to rescue funds was necessary and right and a means of safeguarding the euro.

I cannot see that it violated the constitution in any way, he told reporters.

Asked whether Germany would have more room to cut taxes to boost the coalition's popularity if it had not aided Greece, finance minister Schaeuble said the link was tenuous.

Without a common European currency we would be in a much worse situation and we would not have ... less than 3 million unemployed but more than 5 million unemployed, he said.

We are not just defending European unity and the common market and common currency, but the wealth and social security of its people, Schaeuble told reporters in Karlsruhe.

(Editing by Paul Taylor)

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