The top German official at the European Central Bank is to quit early in disagreement with the bank's policy of buying euro zone government bonds to combat the currency bloc's debt crisis.

After Reuters exclusively reported that Executive Board Member Juergen Stark, the central bank's chief economist, would quit, the ECB confirmed that he would leave before the end of the year once a replacement had been found.

The euro fell immediately on the shock development, which dramatized a rift inside the central bank over the handling of the deepening debt crisis and could undermine German public support for the euro.

Stark's departure, almost three years before his term is due to expire in May 2014, would deepen a gulf between the ECB, which manages the currency of the 17-nation European currency area, and German guardians of central bank orthodoxy.

Former Bundesbank President Axel Weber, who had been the frontrunner to succeed ECB President Jean-Claude Trichet when he retires at the end of next month, resigned and withdrew from the race in February in protest at the same policy.

Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president, said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to Bundesbank chief Jens Weidmann.

It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB.

Trichet made an emotional defense of the bank's performance against German criticism at a news conference on Thursday, angrily telling a German questioner that the ECB's record of inflation fighting in Germany over the last 12 years had been better than the Bundesbank's.

Stark was one of four members of the ECB's policymaking governing council who sources said voted against last month's controversial decision to revive the dormant bond-buying program and start buying Italian and Spanish debt after the two countries' borrowing costs ballooned amid market fever.

Since then the ECB has bought more than 35 billion euros in bonds, significantly reducing Italian and Spanish spreads over benchmark German Bunds, on top of the 76 billion euros in Greek, Irish and Portuguese bonds it has bought since May 2010.

ECB President Trichet was in the southern French city of Marseille for a meeting of Group of Seven finance ministers and central bankers and was not available for comment.

Stark's decisions means Trichet's designated successor, Bank of Italy governor Mario Draghi, will start his eight-year term in November with a mountain to climb to restore the central bank's credibility in Germany, Europe's biggest economy.

UNCERTAINTY OVER GREECE

The news added to uncertainty over the situation of Greece, the country where the euro debt crisis began in late 2009.

A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance on Friday with expectations of take-up by private creditors slipping amid fierce European pressure on Athens.

Banks and insurers were due to indicate whether they intend to join the bond exchange, part of a planned second international bailout package agreed in July which is in doubt due to Greece's failure to meet its fiscal targets.

Officials said they expect a take-up rate of about 70 percent, well short of the original 90 percent target, which would see 135 billion euros ($189 billion) of Greek bonds maturing by 2020 swapped or rolled over in a global transaction.

Greece had threatened to cancel the deal unless it got 90 percent participation but is in no position to walk away as it already faces the threat of its EU partners blocking bailout loans if it does not improve its debt-cutting performance.

Even with a participation rate of 70 percent or better, which is my current view, (it) will proceed, said an Athens-based banker close to the procedures.

No official announcement of the take-up rate was expected on Friday, but a source close to the scheme said a bigger response rate was likely as bond holders rush on the last day.

Germany and its north European allies made private sector involvement one condition for a second rescue of Greece by international lenders, but it is unclear how any shortfall will be met if participation is lower than initially forecast.

Markets are worried not only about the debt swap but also over an impasse in Athens' negotiations with the European Union and the International Monetary Fund, and the wider impact of the euro zone debt crisis for banks' solvency.

IMF Managing Director Christine Lagarde renewed her call to European countries on Friday to take urgent action to recapitalize banks at risk from their sovereign debt exposure.

Speaking hours before attending the G7 meeting, Lagarde said in London: In view of the heightened risks and uncertainties -- and the need to convince markets -- some banks need additional capital.

We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis. That is why action is needed so urgently so that banks can return to the business of financing economic activity.

EU officials have publicly brushed off Lagarde's call and dispute the IMF's estimates of banks' capital needs.

But an EU official involved in crisis management said privately there was concern in Brussels that negative feedback loops between sovereign debt and the banking sector were materializing and could cause grief for some euro zone banks.

EU and IMF inspectors suspended talks and went home last week after Greece admitted this year's budget deficit would be well above the target set in its first 110 billion euro rescue program and failed to present a draft 2012 budget.

European partners have since ratcheted up pressure on Athens, warning it will not get the next 8 billion euro tranche of loans due this month if it does not improve fiscal discipline.

Some senior politicians in Germany, the Netherlands and Finland are suggesting Greece may have to leave the euro zone, although Dutch Economy Minister Maxime Verhagen said a Dutch proposal for a European fiscal discipline czar was not intended to push Greece out.

Governments in northern Europe are under pressure from public opinion angry at euro zone bailouts, fuelling support for populist Euro skeptical parties such as the True Finns, Finland's main opposition party.

True Finns leader Timo Soini told Reuters Insider television in an interview that Greece was bound to default and prolonging bailouts would only make matters worse by pouring in taxpayers' money to support cheats.

We think also that those countries that cannot follow the rules, they must exit the system. Or the other option is that countries like Finland, Holland, maybe Germany, leave because they cannot pay any more, he said.

(Additional reporting by George Georgiopoulous in Athens, Alan Wheatley and Mark Cotton in London, Jan Strupczewski and Philip Blenkinsop in Brussels; Writing by Paul Taylor, editing by Mike Peacock)