* France sells bills with negative yields
* Government taking action to meet deficit targets
* France must find extra 33 bln euros in 2013 budget
By Leigh Thomas
PARIS, July 16 (Reuters) - France borrowed nearly 8 billion euros free of interest on Monday from investors, benefiting from its perceived status as a top euro zone borrower even with record debt levels and before a test of the government's appetite for belt-tightening.
France is financing its public debt -- due to peak next year at more than 90 percent of GDP -- at historically low rates after the election of Socialist Francois Hollande as president in May helped dispel political uncertainty and market jitters.
At an auction last week, France sold Treasury bills with negative yields for the first time, a feat the Agence France Tresor debt management agency repeated on Monday. It sold 7.6 billion euros of three-month, six-month and one-year paper -- all with yields of less than zero.
Despite the prospect of being repaid less than they invested, buyers put in total bids worth nearly three times the amount sold, signalling strong demand for the paper.
BNP Paribas economist Dominique Barbet said the government was putting public finances on course to meet its deficit targets, cementing France's place among the strongest euro zone borrowers and setting it apart from Italy and Spain.
"We have won credibility with some investors that we did not have before," he said.
The Netherlands also sold short-term bills at negative yields on Monday as a cut in the European Central Bank's deposit rate earlier this month forced investors to search for safe alternatives to park short-term funds.
While the ECB rate cut is driving investors into the short-term debt of the euro zone's higher-rated borrowers, France also benefits from having the one of the most liquid bond markets in the world.
The record low borrowing rates also suggest that Hollande's pledge to make tackling the deficit and debt a top priority has won over not only voters but also investors.
"Improving the public finances is not an end in itself," Finance Minister Pierre Moscovici said in a debate on the 2012 budget at the lower house of parliament.
"In a word, it's an indispensable condition to achieve the changes that we were elected to make," he added.
The favour France is now finding with financial markets contrasts sharply with late last year, when the country was seen increasingly as drifting away from core euro zone countries.
Credit rating agency Standard and Poor's stripped France of its AAA rating at the start of the year in a mass downgrade of euro zone countries, and analysts at ING say the country's public finance fundamentals still point to further downgrades.
The government is raising an extra 7.2 billion euros ($8.8 billion) in taxes targeting mainly wealthy households and big companies in order to plug a shortfall in its 2012 budget.
Tax hikes were deemed necessary to keep deficit reduction targets on track with the government aiming to cut the public deficit to 4.5 percent of GDP this year and 3 percent in 2013.
Although the new tax increases have put France on track to meet this year's target, the government says it will need to find 33 billion euros of savings for 2013.
"We're working on it. The impact of this adjustment on our economy has to be kept in check and the effort has to be shared fairly," Moscovici said in an interview with Le Monde newspaper.
The national public audit office said earlier this month that meeting the 2013 target would be crucial for maintaining France's credibility with financial markets, as the euro zone debt crisis continues to rage.
With the government expenditure accounting for a greater share of GDP than in any OECD country but Denmark, the Court of Auditors said France must tackle spending -- something for which the government so far is showing less enthusiasm.
In addition to the 7.2 billion euros in new tax increases, a budget revision bill to be debated in parliament aims to raise nearly another 7 billion euros in extra revenue in 2013.
"This is just the first stage," Moscovici said. "The balance between revenues and spending will be spread perfectly between 2012 and 2017 because we don't want austerity," he said, referring to the government's five-year mandate.
Many economists say that spending cuts may be necessary especially if growth falls short of government forecasts for 0.3 percent this year and 1.2 percent in 2013.
"I am very worried about your capacity to stick to the 2013 target of 3 percent," the conservative head of the parliament's finance committee, Gilles Carrez, said during the debate, claiming the current "excellent financing conditions ... were inherited from the previous (conservative) government."