Merkel deflects pressure to boost euro bailout funds

German Chancellor Angela Merkel gestures next to Spain's Prime Minister Mariano Rajoy as they arrive for a news conference after a meeting in Berlin January 26, 2012.

BERLIN (Reuters) - Chancellor Angela Merkel tried to deflect growing international pressure on Germany to agree an increase in the euro zone's bailout funds on Sunday by saying talks were still continuing.

Amid calls to raise the size of the permanent European Stability Mechanism (ESM) ahead of an EU summit on Monday, Merkel was asked by Bild am Sonntag newspaper about "rising pressure" on Germany to "massively increase" the bailout fund.

But the chancellor did not address the issue of whether Germany would back raising the ESM and instead answered a question about what impact increasing the ESM might have on the German budget this year.

"The negotiations are continuing on whether we'll pay in our contribution in one tranche or two tranches," said Merkel, who has resisted calls for Germany to back increasing the bailout funds in part due to opposition in her centre-right coalition.

"But independent of all that, our deficit level as far as the European Stability Pact is concerned will not be increased as a result because the money won't be gone. It's only to be transferred from the federal budget to the ESM."

Merkel is keen to avoid the EU summit being sidetracked by debate about whether extra funding should be funnelled into the euro zone bailout funds, as the International Monetary Fund and some euro states -- including Italy and Spain -- have suggested.

A close Merkel ally in parliament, Peter Altmaier, said it made sense to first see how effective the ESM is.

"It would be good if we make good use of the amounts that are now available," Altmaier, a senior MP, told German radio.

Austrian chancellor Werner Faymann said in an interview in Der Spiegel news magazine he believed the 500-billion euro ESM firewall may need to be raised, echoing appeals made in Berlin by IMF head Christine Lagarde and Italian premier Mario Monti.

"I wouldn't promise my parliament that 500 billion euros will be enough," Faymann said, adding his government was preparing to contribute to a higher firewall by taking funds from the European Financial Stability Facility (EFSF).

"This is the direction it should go -- that way we'd come up with a total of about 750 billion euros," he said. "Financial markets are observing us closely and measuring how strong we are by looking at the size of the firewall. If it's too low, we'll be giving the markets a reason to speculate against us."

German government sources have told Reuters Merkel does not rule out boosting funds if the euro zone crisis deteriorates over the coming months. But only the threat of a disaster may persuade her coalition to back more funds for the currency bloc.

The German government believes that there should not be any discussions about increasing the firewall until March.

The leader of Germany's centre-left opposition in parliament, Frank-Walter Steinmeier, said Merkel was making a mistake by resisting calls to raise the ESM.

"You can argue whether continually coming up with new bailout funds is the right way to go," Steinmeier told the Welt am Sonntag newspaper. "But for those who decide in a situation like this to set up a permanent bailout fund, they should realise that this one is definitely not big enough."

Steinmeier, foreign minister under Merkel in the 2005-2009 grand coalition and a possible challenger in 2013, said that Merkel had failed to inspire public confidence during Europe's worst post-war crisis, by repeatedly changing course.

"She has annoyed a lot of people and put them off on Europe by continuously changing direction," said Steinmeier.

"As Europe's strongest export nation we have a fundamental interest in preventing this crisis from becoming a permanent recession for all of Europe," he added. "If Europe isn't doing well, then Germany won't be doing well either."

(Additional Reporting By Andreas Rinke; Editing by Sophie Walker)