* New plan would impose much smaller levy on shares from 2014
* Revised tax could raise only one tenth of original target
* Levy may be rolled out only later to bonds, derivatives
* Banks opposed levy, London taking legal action
(Adds political, industry reaction)
By John O'Donnell and Ilona Wissenbach
BRUSSELS, May 30 (Reuters) - European countries planning a tax on financial transactions are set to drastically scale back the levy, cutting the charge by as much as 90 percent and delaying its full roll-out for years, in what would be a major victory for banks.
Such sweeping changes would blunt the impact of the tax, pushed for by German Chancellor Angela Merkel and popular with voters who blame bankers for the financial crisis.
The revisions have yet to be formally proposed but were revealed to Reuters by officials working on the project.
Banks have lobbied furiously against the tax, due to be levied by Germany, France and nine other European states. It has also hit legal challenges from Britain, which will not join the tax but fears being forced to collect it on behalf of other EU states, driving business from London's financial centre.
Under the latest model, the standard rate for trading bonds and shares could drop to just 0.01 percent of the value of a deal, from 0.1 percent in an original blueprint drafted by Brussels. That would raise only about 3.5 billion euros, rather than the 35 billion initially forecast, a senior official said.
The tax may now also be introduced more gradually: rather than applying to trades in stocks, bonds and some derivatives from 2014, it may apply next year only to shares. Bond trades would not be taxed for two years and derivatives even later.
The roll-out could be scrapped altogether if, for example, the tax pushed traders to move deals abroad to avoid paying it.
Proponents of the tax said such changes would render it toothless.
"Today, the question is whether the chancellor's (Merkel's) word is worth anything or if the centre-right coalition have bent again to lobbying pressure from the financial sector," Juergen Trittin, the leading German Green politician, told Reuters.
The Financial Transaction Tax (FTT) resurrects an idea first conceived by U.S. economist James Tobin more than 40 years ago and has been symbolically important for politicians to show they are tackling the banks blamed for causing the financial crisis.
But implementing it has faced both practical challenges and political hurdles.
"The whole thing will have to be changed quite a lot," said one of the officials, who has closely followed negotiations over the levy, agreed last October and drafted by the European Commission. "It is not going to survive in its current form."
"You can introduce it on a staggered basis," said a second official. "We start with the lowest rate of tax (0.01 percent) and increase it bit by bit."
Any final decision is up to the countries that have signed up and remains months away. Germany, for example, is unlikely to back any scaling down of the levy in public before elections in September, because Merkel's coalition has committed to it.
A spokeswoman for Algirdas Semeta, the European commissioner in charge of tax policy said there was a lot of technical work still to be done on the proposal.
"Depending on the speed of progress from here, it is still feasible that the common FTT could be implemented in 2014, although January 2014 is looking less likely," she said.
Seven months ago, Germany, France and nine other countries - Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia - agreed to press ahead with the levy, having failed to persuade all 27 EU member states to sign up.
Some cash-strapped countries have already begun counting on the new income, a welcome windfall when shrinking economies and rising unemployment are sapping tax revenue. But in a world where billions of euros can be moved at the stroke of a finger, even some of the tax's backers are getting cold feet.
One euro zone ambassador involved in discussions among countries on the proposal said early enthusiasm was waning as governments became aware of the potential pitfalls.
"If one thing is clear, it's that the financial transactions tax is not going to fly as far as originally hoped," he said.
Those sentiments are echoed by Daniel Gros, the head of the Centre for European Policy Studies, a Brussels think-tank.
"As it is designed right now, it doesn’t make sense," he said, advocating a more straight-forward sales tax on banks.
The tax faces many obstacles, including how it should be collected and whether it should be imposed according to where the buyer or seller is based, or where the traded security is issued.
In the current design, if either the buyer or seller is based in one of the participating countries, the levy can be imposed even if the transaction takes place elsewhere, such as in London. Luxembourg and Britain fear this will hit trading in their financial centres and could lumber them with the task of collecting the levy, despite not being involved.
Within the group of 11 countries, Italy and France have expressed concerns about widening the tax beyond shares to government debt as both believe it could discourage investors from buying their bonds.
Furthermore, it remains unclear how the tax could be levied on the trading of complex derivatives - a market that is valued in the trillions of euros - or how to prevent an exodus of activity to regions that do not impose any such tax.
"The risk is that if you have some countries not participating, you have some shift of business from the countries in the tax to the countries without the tax," said one official, familiar with French government thinking. "This step by step approach can make sense."
Antoine Kremer of the Association of the Luxembourg Fund Industry said scaling back the levy would not address industry concerns.
"A reduced tax rate and scope will lessen the impact but not solve the underlying problem," he said. "An FTT will hit investors, retirees and the competitiveness of European financial products globally."
(Additional reporting by Luke Baker in Brussels, Swaha Pattanaik in London and Hans-Edzard Busemann in Berlin; Editing by Peter Graff)
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