By Daniel Flynn and Catherine Bremer
PARIS (Reuters) - Growing fears of a tip back into global recession are piling pressure on G7 finance chiefs meeting in France Friday to moderate austerity drives in some rich economies and unleash a new round of monetary stimulus.
The grouping of finance ministers and central bankers from the seven big industrialized economies, which will gather in the Mediterranean city of Marseille, will also discuss the health of Europe's banking system after dramatic market sell-offs in August betrayed mounting anxiety among investors.
G7 sources said the agenda for the day-long talks was "fluid" and that G7 chair France would seek to emphasize the group's commitment to preserving the fragile global recovery.
"I'll discuss with my G7 counterparts and central bankers in Marseilles a coordinated response to the economic and budgetary situation," French Finance Minister Francois Baroin told parliament Tuesday. "We're in talks ... to reach agreement on policies to foster growth, create jobs and repay our debts."
One source said the United States, Canada, Japan, Germany, France, Italy and Britain could agree to keep monetary policy accommodative, to slow deficit-cutting where possible and push through structural reforms.
The monetary policy discussion would include issues such as quantitative easing, the source said.
Baroin said the meeting would take its lead from President Barack Obama, who is due to unveil Thursday a much-anticipated package of new proposals to spur hiring.
Yet analysts said that the Group of Seven's scope for concrete action was limited given the enormous debts weighing on developed economies from Tokyo to Washington and resistance from major emerging nations to monetary easing, which they say stokes inflation and asset bubbles in their economies.
"I fail to see what the G7 can do. Those countries which support fiscal stimulus measures don't have the room to do it, and those who have the room, don't want to do it," said Gilles Moec, senior economist with Deutsche Bank in London.
Within the euro zone, high debtors like Spain and Italy have no room for stimulus whereas powerhouse Germany has the means but lacks the political will. Non-euro member Britain would also struggle today to fund stimulus measures.
"The way this country and other countries are going to get growth is not by taking yet another fix of the debt-fueled spending bubble that got us into the mess we are in at the moment," UK finance minister George Osborne told parliament on Tuesday.
That leaves the ball squarely in the court of central banks and there are strong signals that, on a piecemeal basis, policy will be kept loose for the foreseeable future.
The summit will come a day after monthly meetings of the European Central Bank and Bank of England, giving an indication of how open the lenders are to further monetary stimulus.
"On monetary policy, where there is more room for action, I don't expect a grand coordinated approach unless something catastrophic takes place in the next two days," Moec said.
GERMANY REBUFFS IMF
Fears the global economy may have entered its most difficult period since the collapse of Lehman Brothers has injected a sense of urgency into talks, which will conclude with a late-evening briefing by France, chair of the G7 and G20.
But euro zone paymaster Germany appeared to have turned a deaf ear to an appeal by IMF chief Christine Lagarde for rich nations to act urgently to save the global recovery, including recapitalizing European banks and slowing austerity measures.
German Finance Minister Wolfgang Schaeuble insisted on Tuesday that austerity remained the only means to return the 17-nation bloc to lasting growth, and he blasted the IMF's estimate of a 200 billion euro funding gap with European banks as "partly wrong and partly misleading."
"We consider the IMF's estimates of the supposed recapitalization requirements of European banks to be inflated," he told parliament. "We can and must talk about this in the context of the G7 finance ministers meeting in Marseille."
One senior G7 source said ministers were expected to call on euro zone governments to press ahead quickly with strengthening the bloc's bailout fund, as agreed in July, echoing calls on Monday from ECB President Jean-Claude Trichet.
In a bid to calm market turmoil last month, the leaders of France and Germany announced a slew of proposals that included a call for euro zone states to put balanced budget rules in their national constitutions.
"All euro zone states need to improve their finances without hampering growth," French Budget Minister Valerie Pecresse said.
Japanese, Chinese and South Korean financial regulators discussed global threats from faltering growth in the United States and Europe in a conference call Tuesday.
A deepening of Europe's debt troubles or a U.S. recession would hit Asia's export-driven economies via both trade and investment, further bleakening the global economic outlook.
With growth constrained in the West, investors are hoping emerging markets can pick up the slack. But growth is also slowing in countries like China and high inflation there makes policymakers disinclined to provide an artificial boost.
Talks will also hone in on the sharp rise in the Swiss franc and yen, both safe haven currencies which have climbed in value as investors fret about the euro zone and U.S. economies.
The Swiss National Bank shocked forex markets Tuesday by setting a minimum exchange rate target of 1.20 francs to the euro, knocking back a safe-haven currency rally which has threatened its economy with recession.
The move prompted speculation that Japan might follow suit to cap the rising yen, which could derail the country's recovery from the blow to the economy of March's earthquake and tsunami.
Japan's new finance minister Jun Azumi made clear Monday that Tokyo was far from comfortable with current yen levels and said he would seek to convince G7 finance chiefs that a strong yen was detrimental for the world economy as well as Japan's.
"Japan ... will probably bring up the strong yen as a topic at the G7 meeting this weekend," said Koichi Haji, chief economist at the NLI research institute in Tokyo. "It will try to seek understanding from G7 counterparts to intervene unilaterally."
The ministers may also discuss a highly divisive proposal by France and Germany to impose a European-wide tax on financial transactions, an idea that investment banks and the ECB strongly oppose. Britain is also against the plan.
(Additional reporting by Leigh Thomas and Marc Angrand in Paris, Jan Strupczewski in Brussels, Tetsushi Kajimoto in Tokyo and Fiona Shaikh in London, editing by Mike Peacock)