* Leaked draft seen as legitimising nuclear funding
* Commission says it will still decide each case
* New nuclear needs state support in order to be built
By Barbara Lewis and Karolin Schaps
BRUSSELS/LONDON, Aug 14 (Reuters) - European Union rules to be published over the coming weeks could make it easier to justify using taxpayers' money to fund new nuclear power, which would pitch major EU powers against each other.
The European Commission, the EU executive, says its mind is still open on the topic, but it is under pressure to set a legal framework for state aid to nuclear projects after several member states, including Britain, sought its guidance.
Whatever it lays down, as part of a wider modernisation of state aid rules, is likely to widen a rift between anti-nuclear nations, such as Germany and Austria, and those willing to support the technology, including Britain and the Czech Republic.
A Commission spokesman said the executive is not planning to encourage nuclear state aid, but lawyers said a leaked draft of its proposal last month indicated it was leaning towards allowing nuclear financing.
"Each notification by a member state would of course still be subject to a case-by-case analysis by the European Commission," said a spokesman for the Commission's competition directorate, which leads on state aid rules.
Lawyers say the Commission does have the ultimate say on state aid but that the process of issuing guidelines and carrying out a consultation could legitimise nuclear state aid for new builds, rather than just for short-term emergency funding as has happened in the past.
The guidelines on environmental and energy aid for 2014-2020 are expected to be published around the end of September, after elections in Germany scheduled for Sept. 22.
Following consultation with member states, they would need to be approved by the EU Commissioners meeting as a body, which is not expected until next year.
"There is still a long way to go before the European Commission recognises nuclear alongside renewables as one of the essential energy solutions to climate change," said a spokesman for the World Nuclear Association, a global network representing the nuclear industry.
SUPPORTERS AND OPPONENTS
Opponents of nuclear power, including environmental groups, say government funding for atomic power would be a breach of EU legal principles and would mark a major shift in policy.
Under EU law, state aid is designed to address problems that the market cannot solve and must not cause unfair competition. It is in principle reserved for technology in its infancy, such as renewable energy. Nuclear generation began more than half a century ago.
Critics say giving state aid to nuclear projects, and specifically to the handful of firms that are building atomic plants in Europe such as France's EDF or Japan's Hitachi creates a market distortion and puts other energy sources at a disadvantage.
"It is pure hypocrisy," said Claude Turmes, member of the European Parliament representing the Greens.
Other forms of subsidy have attracted fierce criticism, such as funding for renewable power in Germany, where the public cost of its shift from nuclear to wind and solar generation after the Fukushima crisis in Japan has provoked heated debate.
Countries keen to attract nuclear investment have found that developers are unwilling to build nuclear plants without state guarantees on prices for the power generated.
New plants in Finland and France are billions of euros over budget and years behind schedule, and regulatory changes since the Fukushima accident have further inflated costs.
"Building new nuclear power infrastructure is getting increasingly expensive, especially in the aftermath of the Fukushima disaster, and in many cases is now not competitive with other types of energy," Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, said.
The group represents pensions, insurers and other funds responsible for 7.5 trillion euros ($9.75 trillion) in assets, including renewable and fossil fuel energy.
"Without some form of government support or subsidy, the economic case for investing in nuclear is unlikely to improve," she added.
Britain, which is counting on nuclear power to help meet its 2020 target to cut carbon emissions, has proposed a power market reform package that includes guaranteeing a minimum price for nuclear power.
It requires state aid approval from the Commission to legalise the policy, but the executive said it had not yet received a formal application.
British Secretary of State for Energy and Climate Change Ed Davey told Reuters during a visit to Brussels in June he was confident Britain's plans for financing new nuclear would "easily get state aid clearance".
He added, "There are some countries with a very large nuclear industry. If they close, we don't have a cat in hell's chance of tackling climate change. I would love to think we can replace that with renewables alone, but frankly we won't be able to."
The Czech Republic is considering a similar mechanism of state-backed power price guarantees.