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UPDATE 2-Europe crisis a "clear and present danger" - Canada

* Flaherty expresses frustration on Europe before G7 meeting

* Says U.S. politicians grasp urgency of "fiscal cliff"

* Says Canada seeing modest growth, on track with budget

(Adds details) By David Ljunggren

OTTAWA, Oct 3 (Reuters) - Europe's debt crisis represents a "clear and present danger" and has not improved despite some helpful measures by policymakers, Canadian Finance Minister Jim Flaherty said on Wednesday in some of his harshest language yet on the issue.

An outspoken critic of euro zone leaders for not acting quicker to contain the debt crisis, Flaherty stepped up the pressure again just days ahead of a meeting of finance ministers from the Group of Seven major developed economies on Oct 11.

"The overriding concern at the meetings? Europe is number one, it has to be number one, because it is the clear and present danger and it remains that," he told reporters.

"Things have not gotten better in Europe, because of the lack of action," he added.

"There have been a couple of steps taken by the European Central Bank, by Mario Draghi, which are helpful and go in the right direction. But the fact that we still have under-capitalized banks in Europe and that we have issues with respect to sovereign indebtedness that persist - those facts haven't changed."

The G7 meeting will take place on the sidelines of annual International Monetary Fund and World Bank gatherings in Tokyo next week.

Flaherty's tone contrasted with that of Japan, which is hosting the meetings and praised Europe on Wednesday for the tough reforms undertaken so far.

Canada's Conservative government, billing itself at home as fiscally cautious, is resisting pressure from other countries to contribute extra money to the IMF so that it can help Europe, Flaherty said.

"We will maintain our position. These are wealthy countries in the European Union and they can finance their own resolution of the issue," he said.

Europe is set to tell the G7 that the U.S. fiscal troubles also pose risks to the global economy, but Flaherty was less gloomy about the U.S.' future.

He believes most members of Congress understand the urgency of avoiding the "fiscal cliff", which refers to the combination of spending cuts set to take effect on Jan. 2 and tax increases that could seriously dent U.S. growth.

"This must be dealt with because if it's not dealt with, then the effect on U.S. GDP will be very significant, and that of course directly affects Canada," he said.

For now, Canada has modest economic growth and is on track to meet its fiscal targets, though not surpass them, the minister said.

"I would not anticipate that," Flaherty said, when asked whether he expected this year's deficit to be smaller than the C$21.1 billion shortfall the government has forecast.

"It is within the range of what we anticipated but there are pressures we have on the spending side, some of which we had to deal with, so we're okay. We're on track."

(With additional writing by Louise Egan; Editing by Peter Galloway and Jeffrey Hodgson)

((louise.egan@thomsonreuters.com)(+1 - 613 - 235 - 6745)(Reuters Messaging: louise.egan.reuters.net@reuters.com))

Keywords: IMF EUROPE/CANADA