Finance chiefs raced on Saturday to agree on ways to support growth and make global banks safer with a warning from Washington ringing in their ears that Europe and Japan must do more to boost home-grown demand.

Finance ministers and central bank governors from the Group of 20 industrial and emerging economies were working through a communique drawn up overnight by their deputies aimed at soothing global markets unnerved by a spreading debt crisis in Europe.

The euro plunged to a four-year low on Friday, partly on concerns that Hungary could be facing a debt crisis similar to that of Greece, which had to turn to fellow euro zone members last month for a 110 billion euro bailout.

In a letter to his counterparts ahead of the G20 meeting in this South Korean port city, U.S. Treasury Secretary Timothy Geithner welcomed Europe's steps to stem the crisis, which include a 750 billion euro financial safety net.

Implementing those measures would help to limit risks to the global economy, which is recovering from its deepest recession in 80 years brought on by the 2007/08 banking system meltdown.

But Geithner, in a letter sent on Thursday, said global growth would fall short of potential unless the rest of the world compensated for a drop in aggregate demand caused by a rise in U.S. savings as debt-strapped households tighten their belts.

In this context, we are concerned by the projected weakness in domestic demand in Europe and Japan, Geithner wrote.

He singled out the need for European surplus countries -- code principally for exports powerhouse Germany -- to ensure sustained growth in domestic demand. China, which also runs a big external payments surplus, should let its exchange rate rise to promote more spending at home, Geithner added.

Germany has a budget shortfall of more than 5 percent of national income that is relatively modest by European standards.

But deficit spending is anathema to most German politicians and voters, and a senior German official said Finance Minister Wolfgang Schaeuble would soon announce that Berlin would start unwinding its anti-crisis stimulus outlays from 2011.

PUT YOUR BANKS IN ORDER

Geithner also piled pressure on Europe to help recovery by doing more to restructure and recapitalize its banks, many of which were badly weakened by the financial crisis and are heavily exposed to struggling euro zone debtors.

This process would be advanced by a reaffirmation by governments of existing capital and guarantee programmes, and by a broader effort to enhance transparency and disclosure of the major interconnected financial institutions, Geithner wrote.

American officials, so far in vain, have been pressing European governments to conduct stress tests to gauge the capacity of their banks to withstand another market crash.

The U.S. Treasury chief has been emboldened by the passage of bills in both houses of the U.S. Congress that he said addressed all the major principles of banking reform laid out by the G20.

He said he expected a strong package of measures to become law this summer.

A communique to be issued later on Saturday after two days of talks is likely to stop short of endorsing a global bank levy to pay for future financial bailouts. Canada, Australia, India and Brazil are among those opposed to the plan.

G20 leaders meeting in Toronto later this month will instead be presented with a list of reform options from which they can choose.

Geithner urged his counterparts to subject all dealers and major participants in derivatives markets to supervision and regulation, including conservative capital and margin requirements, to mitigate the potential for systemic risk and market abuse.

(Writing by Alan Wheatley; Editing by Tomasz Janowski)

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