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Talk of proposals to leverage up the 440 billion euro ($598.5 billion) bailout fund to multiply Europe's financial firepower lifted global stocks on Tuesday but made it harder for Merkel to unite her fractious center-right coalition.

The Bundestag (lower house) is sure to approve a widening of the scope of the European Financial Stability Facility to aid weak states and banks, agreed by European leaders in July, since the opposition Social Democrats and Greens say they will vote for the measure on Thursday.

But a revolt by Euro skeptical backbenchers hostile to further bailouts in Merkel's conservatives and their liberal Free Democratic coalition partners may leave her without a majority in her own camp.

In an internal vote on Tuesday, 11 deputies from Merkel's CDU/CSU group voted against the motion and two abstained. Coalition sources said they expected between 2 and 5 FDP lawmakers to vote against and up to 6 to abstain.

If more than 19 coalition lawmakers vote against or abstain, Merkel will be dependent on opposition votes in a political humiliation that could weaken her ability to push through future rescues.

European shares surged by 4.3 percent in the biggest one-day percentage gain since May 2010 and safe-haven German bonds fell on reports that policymakers were preparing decisive action to tackle the debt crisis.

The cost of insuring Italian, Spanish and French debt against default also fell on hopes of a bold solution, which appear to have little grounding in immediate political reality.

German Finance Minister Wolfgang Schaeuble was forced to deny that any increase in the volume of the bailout fund is planned in a bid to calm irate center-right lawmakers.

"We do not intend to increase it," Schaeuble told n-tv.

That did not directly address the question of whether the EFSF fund could be leveraged to raise more money to prevent contagion spreading from Greece to Italy and Spain, the euro zone's third and fourth economies.

LIABILITY

Leverage would make it possible to borrow more, probably from the European Central Bank, for financial firefighting without increasing the EFSF's size, but critics say it would also raise German taxpayers' liability for any losses.

Some lawmakers are concerned that EU officials are just waiting for them to approve what they were assured would be the final increase before pressing ahead with bigger bailout plans.

French Finance Minister Francois Baroin made clear there were tactical reasons to avoid discussing how to boost the fund's firepower before the German decision.

"It is out of the question to put forward, three days from the Bundestag (lower house) vote, the issue of whether we should increase the fund... Let's not open Pandora's box on something that is a red flag for Germany," he said.

Prime Minister Francois Fillon told parliament France would set out proposals to step up the battle against "speculative attacks" on the euro zone once the German vote was over.

The fund's status was bound to evolve but it was premature to say whether it might work "like an equity fund with a lever effect," Baroin added.

Merkel assured Greek Prime Minister George Papandreou at a meeting on Tuesday evening in Berlin that Germany wants a strong Greece and would do everything necessary for that. She also said she was confident her coalition would have the votes on its own to pass measures boosting the euro zone rescue fund.

Papandreou told Merkel that Greece needed Europe's solidarity. "It is very important to receive a signal of support from our European partners," he said.

Earlier, Papandreou had promised German industrialists that Greece would meet its commitments under its EU/IMF bailout program despite missing key fiscal targets so far.

"I can guarantee that Greece will live up to all its commitments," Papandreou said.

Merkel told the same forum: "We will provide all the help desired from the German side so that Greece regains trust." However, some of her ministers have openly questioned the country's ability to avoid default and stay in the euro zone.

DAMAGE

The Greek parliament approved a deeply unpopular new property tax on Tuesday, one of several extra austerity measures the government is rushing through to plug a budget hole uncovered by EU/IMF inspectors earlier this month.

Ordinary Greeks, exasperated by pay and pension cuts, mass unemployment and tax rises, staged new strikes and demonstrations outside parliament on Tuesday. [ID:nL5E7KR0FY]

German and French government economic advisers urged in a joint article on Tuesday that Greece be allowed to write off around 50 percent of its debt and called for support for banks with large Greek holdings. [ID:nL5E7KR0JX]

Greek Finance Minister Evangelos Venizelos, back from talks with the International Monetary Fund, said speculation on default scenarios was harming his country and it was crucial to stick to the July 21 agreement on a second rescue for Greece.

Venizelos said the so-called troika of senior EU/IMF inspectors would return to Athens this week and Greece would receive the next 8 billion euro instalment of aid in time to avoid bankruptcy next month. A source close to the team said they would probably return on Wednesday to complete a review of compliance with the bailout program. [ID:nP7E7II01Z]

Most analysts expect Greece to get the cash but default anyway within a few months, perhaps early next year.

European Central Bank board member Lorenzo Bini Smaghi fueled expectations of a larger bailout pool by saying on Monday that policymakers were working on "how to leverage the money out of the EFSF in a more innovative and efficient way."

Citing U.S. programs to rescue banks during the 2008-9 financial crisis, he said EFSF funds could be used as collateral to borrow from the central bank, making more money available for crisis fighting. His ECB colleague Ewald Nowotny also said an increase in the funds available was being discussed, though it might not be as high as some expected.

But German Bundesbank chief Jens Weidmann, the leading hawk on the ECB's governing council, poured scorn on such options, saying they would discourage politicians from taking tough decisions to cut budget deficits and weaken faith in the euro.

The European Investment Bank, the 27-nation EU's soft-loan project finance arm, denied a U.S. television report that it might get involved in leveraged finance for euro zone bailouts, which diplomats said was legally impossible. [ID:nB5E7KL004]

Credit ratings agency Standard & Poor's was quick to warn when talk of leveraging the EFSF became public last week that such a move could potentially trigger ratings downgrades for leading euro zone countries Germany and France. [ID:nW1E7JU02F]

A senior EU official said many ideas for how to leverage the rescue fund were being floated but it would take time to check the legality of such options and build political consensus in the 17-nation euro zone for any change.

"Nobody wants to talk about this before Thursday night," he said in a reference to the German parliament vote. "It cannot be discussed formally before the Bundestag (lower house) and maybe all other national parliaments have voted."

Slovak lawmakers will be last to vote on the widening of the EFSF's powers on October 11, leaving little time to agree on further measures before the bloc's next summit on October 17-18.

In Bratislava on Tuesday, the junior government party rejected a proposal made by its larger partner aimed at winning joint coalition support in parliament for plans to strengthen the bailout fund.[ID:nL5E7KR2IR]

(Additional reporting by Alexandra Hudson, Brian Rohan and Sarah Marsh in Berlin, William James and Ana Nicolaci da Costa in London, Nigel Davies in Madrid, Nicholas Vinocur in Paris; Writing by Paul Taylor; Editing by Janet McBride)

European shares rallied for a second day and safe-haven German bonds fell on reports that European policymakers were preparing more decisive action to tackle the bloc's sovereign debt crisis by leveraging up the 440 billion euro rescue pot.

German Finance Minister Wolfgang Schaeuble was forced to deny that any further increase in the bailout fund is planned in a bid to calm irate lawmakers in the center-right coalition. Parliament holds a crucial vote on Thursday on July's EU agreement to extend the scope of the existing fund.

"We do not intend to increase it," Schaeuble told n-tv.

That didn't directly address the question of whether the EFSF fund could be leveraged to raise more money to prevent contagion spreading from Greece to Italy and Spain, the euro zone's third and fourth economies.

While leveraging the fund to borrow more money for financial firefighting would not require an increase in the EFSF's size, critics say it could raise German taxpayers' liability for any losses. Some lawmakers are concerned that EU officials are just waiting for them to approve what they were assured would be the final increase before pressing ahead with bigger bailout plans.

French Finance Minister Francois Baroin made clear there were tactical reasons to avoid discussing how to boost the fund's financial firepower before the German decision.

Asked at a dinner in Paris whether there was a need to boost the EFSF, he said: "It is out of the question to put forward, three days from the Bundestag (lower house) vote, the issue of whether we should increase the fund... Let's not open Pandora's box on something that is a red flag for Germany."

The fund's status was bound to evolve but it was premature to say whether it might work "like an equity fund with a lever effect", Baroin added.

Merkel has been lobbying lawmakers intensively to ensure the government wins with its own majority without having to rely on the center-left opposition, which could destabilize the coalition and severely undermine her authority.

She said Germany would do everything it could to rebuild confidence in Greece, even though some ministers in her own cabinet have openly questioned the country's ability to avoid default and stay in the euro zone.

Merkel was to meet Greek Prime Minister George Papandreou on Tuesday evening after he promised German industrialists that Greece would meet its commitments under its EU/IMF bailout program despite missing key fiscal targets so far.

"I can guarantee that Greece will live up to all its commitments," Papandreou said.

The Greek parliament was due to approve a deeply unpopular new property tax later on Tuesday, one of several extra austerity measures the government is rushing through to plug a budget hole uncovered by EU/IMF inspectors earlier this month.

DAMAGE

Greek Finance Minister Evangelos Venizelos, back from tough talks with the International Monetary Fund, said speculation on default scenarios was harming his country and it was crucial to stick to the July 21 agreement on a second rescue for Greece.

In the latest such talk, German and French government economic advisers urged in a joint article on Tuesday that Greece be allowed to write off around 50 percent of its debt and called for support for banks with large Greek holdings.

Venizelos said the so-called troika of senior EU/IMF inspectors would return to Athens this week and Greece would receive the next 8 billion euro installment of aid in time to avoid bankruptcy next month. A source close to the team said they would probably return on Wednesday to complete a review of compliance with the bailout program.

Most analysts expect Greece to get the cash but default anyway within a few months, perhaps early next year.

European Central Bank board member Lorenzo Bini Smaghi fueled expectations of a larger bailout pool by saying on Monday that policymakers were working on "how to leverage the money out of the EFSF in a more innovative and efficient way".

Citing U.S. programs to rescue banks during the 2008-9 financial crisis, he said EFSF funds could be used as collateral to borrow from the central bank, making more money available for crisis fighting. His ECB colleague Ewald Nowotny also said an increase in the funds available was being discussed, though it might not be as high as some expected.

But German Bundesbank chief Jens Weidmann, the leading hawk on the ECB's governing council, poured scorn on such options, saying they would discourage politicians from taking tough decisions to cut budget deficits and weaken faith in the euro.

Credit ratings agency Standard & Poor's was quick to warn when talk of leveraging the EFSF first became public last week that such a move could potentially trigger ratings downgrades for leading euro zone countries Germany and France.

A senior EU official in Brussels said many ideas for how to leverage the rescue fund were being floated but it would take time to check the legality of such options and build political consensus in the 17-nation euro zone for any change.

"Nobody wants to talk about this before Thursday night," he said in a reference to the German parliament vote. "It cannot be discussed formally before the Bundestag (lower house) and maybe all other national parliaments have voted."

Slovak lawmakers will be last to vote on the widening of the EFSF's powers on October 11, leaving little time to agree on further measures before the bloc's next summit on October 17-18.

(Additional reporting by Andreas Rinke, Brian Rohan and Sarah Marsh in Berlin, William James and Ana Nicolaci da Costa in London, Nigel Davies in Madrid, Nicholas Vinocur in Paris; Writing by Paul Taylor; editing by Janet McBride)

* European stocks were up more than 2 percent in morning trade, with banking stocks such as Deutsche Bank (DBKGn.DE) and BNP Paribas (BNPP.PA) surging around 8 percent, on mounting expectation of more action from euro zone policymakers to stem the Greek debt crisis and help the European banks.

* Shares of Apple Inc (AAPL.O) suppliers rebounded on Tuesday after heavy losses in the previous session as investors remain confident of continued demand for the fast-selling devices of the California-based company. Apple shares traded in Frankfurt (AAPL.F) were up 2.3 percent.

* Boeing Co (BA.N) expects to reach "cash breakeven" on each 787 Dreamliner this decade, Chairman and Chief Executive Jim McNerney said on Monday.

* Motorola Solutions Inc (MSI.N) is being investigated by U.S. regulatory authorities on whether the company paid bribes to win business in Europe, the Wall Street Journal reported, citing people familiar with the matter.

* Bearish bets on major U.S. exchanges rose in the first half of September, suggesting investors added positions as the market declined. Short interest on the Nasdaq rose 4.2 percent in the first half of September, the exchange said on Monday. Short bets on the New York Stock Exchange increased 5.5 percent.

* On the macro front on Tuesday, investors awaited the Fed Midwest Manufacturing Index for August, the S&P Case/Shiller Home Price Index for July, September consumer confidence, as well as the Federal Reserve Bank of Richmond's September indexes on area manufacturing and service sectors.

* U.S. stocks rose on Monday as sentiment swung toward hope that European officials would find a way to cut Greece's debt and shore up European banks.

* The Dow Jones industrial average .DJI shot up 272.38 points, or 2.53 percent, to end at 11,043.86. The Standard & Poor's 500 Index .SPX jumped 26.52 points, or 2.33 percent, to finish at 1,162.95. The Nasdaq Composite Index .IXIC climbed 33.46 points, or 1.35 percent, to close at 2,516.69.

* The CBOE Market Volatility index .VIX fell 5.4 percent but remains more than 20 percent higher for the month.

(Reporting by Blaise Robinson; Editing by Sophie Walker)

After three sessions of wild swings on commodities markets, oil and copper rose, but gold fell further to stand about $300 below the record of more than $1,920 an ounce it scaled in early September.

Turbulence on global markets since late July has been driven by investors' twin fears of renewed recession in the United States, and the chaos that Europe's sovereign debt crisis could inflict on the financial system if it continues unchecked.

European Central Bank policymakers said on Monday that officials were working to increase the firepower of the region's rescue fund in their latest effort to staunch a crisis that U.S. President Barack Obama said was "scaring the world.

U.S. markets reacted positively, finishing more than 2 percent higher on Monday .DJI .SPX, and the mood continued in Asia, where Tokyo's Nikkei .N225 rose 1.6 percent, coming off its lowest close in more than two years. .N .T

MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose 1.5 percent, after plumbing its lowest levels in 16 months on Monday.

Whilst senior ECB officials confirmed the 440 billion euro rescue fund would likely be increased in size, there were also hints from policymakers that the central bank could cut interest rates next month, reversing a hike earlier this year in a move already expected by markets.

"Markets are getting more confident around some action plan in Europe, which is positive, but on the other side, markets are also looking for more policy easing from the ECB, which is negative," said Greg Gibbs, currency strategist at RBS in Sydney.

"The combination of both will leave the euro caught in the middle somewhere."

The single currency traded around $1.3485, down about 0.4 percent on the day, after rallying from an eight-month low of $1.3360 on Monday.

On commodities markets, Brent crude oil rose 0.6 percent to $104.55 a barrel and U.S. crude gained 0.9 percent to $80.95.

Copper, which ended Monday up 2 percent after falling more than 6 percent at one stage, rose 1.2 percent on Tuesday to $7,356 a tonne.

Gold, which has been hammered in recent days by selling by hedge funds to cover losses elsewhere in portfolios, slipped 0.4 percent to around $1,620 an ounce.

(Additional reporting by Cecile Lefort in Sydney; Editing by Daniel Magnowski)

Obama, saying the crisis "is scaring the world," urged leaders of the 17-nation euro zone to act quickly to help a region where banks have not fully recovered from the 2008 financial crisis and which is now suffering from the Greek government's debt crisis.

"They are trying to take responsible actions but those actions haven't been quite as quick as they need to be," Obama told a citizens' meeting in Mountain View, California.

After meeting at the IMF/World Bank and G20 meetings in Washington D.C. last week, European policymakers said on Monday they are working on ways to shore up the euro zone financial system and prevent the region's government debt crisis from spreading, but their mixed messages on the size of a rescue fund and the role of the ECB underscored the difficulties for 17 euro-zone nations in reaching consensus.

ECB Executive Board member Lorenzo Bini Smaghi, speaking in New York, said that the 440 billion euros in the bailout fund, known as the European Financial Stability Facility (ESFS), could be used as collateral to borrow from the European Central Bank making more money available for crisis fighting, but it was up to European Union governments to decide how to do this.

"I know that people are thinking about these things. They may not be willing to admit it in the public, but they are thinking about these things," he said, citing the example of two U.S. programs used to recapitalize banks in the 2008-09 financial crisis.

Officials are examining "how to leverage the money out of the EFSF in a more innovative and efficient way," he told a conference organized by Medley Advisors.

But Germany's central banker Jens Weidmann poured scorn on a beefed-up bailout fund. Leveraging the assets could discourage politicians from taking the tough political decisions to cut budget deficits and would weaken faith in the euro, Weidmann said in Washington.

"A bazooka! I don't think it is a recipe that works in Europe," he told the American Council on Germany.

Markets are not concerned about the size of the rescue fund, rather about the political capacity to deliver, he said

"This is a very dangerous thing. It means you completely blur the responsibility between fiscal and monetary policy."

Germany's Finance Minister Wolfgang Schaeuble speaking in Berlin also ruled out increasing the size of the fund although he had said in Washington over the weekend that leverage without tapping the ECB was possible.

A senior European official told Reuters on Saturday that the aim was for a five-fold leverage to give the fund the firepower to help bigger economies such as Italy and Spain if necessary. Analysts have estimated that 1-2 trillion euros is needed to achieve that goal and win market confidence.

ECB Governing Council member Ewald Nowotny from Austria said at a Harvard University forum in Massachussetts on Monday that an increase in the fund was likely, but it "might not be a trillion (euros).

Investors are anxious to see a plan big enough to backstop European banks and help debt laden euro zone governments. U.S. stocks jumped when CNBC television reported that a detailed plan was in the works to leverage the fund up to eight-fold and to use the European Investment Bank to issue bonds and buy up sovereign debt of troubled countries via the ECB.

An EU official in Brussels involved in crisis resolution dismissed the CNBC report as "just bizarre." The official said talks are in the early stages and those with the EIB involve infrastructure projects.

PRESSURE

In Germany, Chancellor Angela Merkel pressed for the European Union to strengthen its power to discipline member states that break fiscal rules. Budget deficits are the primary source of Europe's debt crisis and Germany's key concern.

"There should be the right to declare such budgets null and void...otherwise we will not get out of the situation," she said in her strongest language yet on common EU fiscal powers.

Germany's legislature is due to vote this week on expanded EFSF powers and leaders are seeking to quell concerns the new bailout fund would discourage countries from cutting deficits.

Europe came under fierce pressure from the United States and other major economies at weekend talks in Washington to take swift action to stop Greece's debt woes from engulfing bigger euro zone states and harming the world economy.

But officials said reports that planning was already in place for a 50 percent write-down in Greek debt and a vast increase in the euro zone rescue fund were highly premature.

"There is no change to the framework we are working on," said a euro zone official who is involved in decision-making on financial assistance to Greece, Ireland and Portugal.

"All this talk of a specific haircut for Greece or an enlargement of the EFSF, it is all just speculation. We are not working along those lines," said the official.

Merkel, struggling to convince her fractious center-right coalition to back a strengthening of the EFSF in a crucial vote on Thursday, warned that letting Greece default would destroy investor confidence in the euro zone.

Diplomats said any talk of a fallback plan for Greece that would raise the cost to German taxpayers could only make her task more difficult in parliament this week.

DEFAULT WITHIN MONTHS?

Private economists and Brussels think-tanks expect a Greek debt default within months, coupled with a capital injection for European banks and a leveraging up of the EFSF.

Euro zone officials acknowledge that such policy ideas are circulating, but insist planning continues on the basis that Greece's debt burden, which is close to 160 percent of GDP, can be sustained as long as its government cuts its fiscal deficit as demanded by the European Commission, the European Central Bank and the International Monetary Fund, the so-called troika.

Treasury Secretary Timothy Geithner warned this weekend that inadequate European crisis management heightens the threat of "cascading default, bank runs and catastrophic risk that must be taken off the table." IMF chief Christine Lagarde, also made clear the euro zone needs to act more decisively, notably to recapitalise banks on a large recapitalizescale.

Quietly, euro zone policy makers accept that a combination of a much deeper Greek debt restructuring allied to coordinated bank recapitalizations and a bolstered rescue fund would make sense, but such a plan would require support from all 17 euro zone countries which can take time in the EU.

"The ideas are all there, but it's not as straightforward as just sitting down and deciding it," said another euro zone financial official involved in handling the crisis.

"Many of us can agree privately that anything less than a 50 percent haircut for Greece would just be cosmetic, but getting that decided by all and implementing it is not so easy."

(Additional reporting by Alister Bull in California, Lesley Wroughton in Washington, Marc Jones in Washingotn, Ros Krasny in Boston and John O'Donnell in Brussels; Writing by Stella Dawson, Paul Taylor; Editing by Catherine Evans and Leslie Adler)