UPDATE 2-Hungary needs to rebuild trust, says EBRD

* EBRD: Hungary needs to rebuild trust with lenders

* Budapest says new FX lending plan should not hit banks

* Poland says considering tax on banks

(Adds Kalman, Belka, changes dateline)

By Boris Groendahl and Marton Dunai

VIENNA/BUDAPEST, Sept 17 (Reuters) - Hungary needs to rebuild trust with international investors and doing so will help the struggling forint currency, the European Bank for Reconstruction and Development said on Friday.

Prime Minister Viktor Orban's centre-right government has confounded markets since sweeping to a huge victory in an April election, shutting down talks with the International Monetary Fund to reclaim what he calls Hungary's "economic sovereignty".

Further comments eschewing austerity and first suggesting it could overshoot next year's budget target agreed with Brussels, and then backtracking to say the goal will be met, have left investors wary, hitting the forint and pushing up debt yields.

European Bank for Reconstruction and Development Thomas Mirow urged Budapest to repair the damage.

"What would help Hungary most is to rebuild trust with international investors," he told Reuters Insider television on the sidelines of a conference in Vienna. "That would also sustain the value of the forint."

Some analysts say Orban could be posturing ahead of local elections next month in which his party hopes to consolidate power by distancing itself of the IMF- and EU-backed cost cutting measures undertaken by Hungary's last Socialist government headed by a technocrat prime minister.

But they are unwilling to bet heavily on Hungary until he presents details of the 2011 budget, and particularly how he plans to cut the deficit to the agreed level of below 3 percent of gross domestic product, from a planned 3.8 percent this year.

After an initial election boost, the forint EURHUF= has lost 6.1 percent since the first round of the election on April 12. Five year bond yields have jumped to 7 percent, from 5.8.

SWISS FRANC LENDING

In Budapest, a ruling Fidesz official said planned new rules aimed at limiting banks' leeway in setting mortgage policy to protect troubled foreign currency mortgage holders must not endanger the country's lending system. [ID:nLDE6891FA] Hundreds of thousands of Hungarian households have taken out foreign currency mortgages and other loans and have been caught out by a rally in the Swiss franc versus the euro, which has helped drive the Hungarian forint to record lows against the Swiss unit CHFHUF= and caused a spike in mortgage payments.

Hungary's banking association has slammed the proposals, which call for banks to allow early mortgage repayment without penalties, among other measures, and said it will destabilise the legal framework behind the banking sector.

But Fidesz Vice Chairman Lajos Kosa said the party would not accept rules that would disrupt banking.

"It is Hungary's fundamental interest that the lending system works smoothly," he told reporters. "We will not accept any kind of solution that would endanger the fundamentals of our lending system."

Another controversial policy from Orban's government is a windfall tax on banks that it says should help to meet next year's fiscal targets while avoiding spending cuts, although many economists say the tax could cripple lending.

Mirow said levies on the banking sector were warranted in some cases but joint, coordinated action was preferable and taxation should not reduce banks' capital.

"Taxing should not eat up capital when the global regulatory objective is to increase capital to strengthen financial sector stability. Reducing capital also diminishes banks' lending capacity when the recovery needs new credit," he said.

Polish central bank Governor Marek Belka also said officials in that country were considering imposing a banking tax, with the latest proposal focusing on uninsured liabilities.

"It could be implemented already starting with next year," he told Reuters Insider television. The EBRD operates in around 30 countries in central and eastern Europe. (Additional reporting by Carolyn Cohn and Sujata Rao in London, Karolina Slowikowska and Adrian Murdoch in Vienna; writing by Michael Winfrey; editing by Patrick Graham)