* NATO seeks ways to make scarce funds go further
* NATO chief calls for rises in defence spending post-austerity
By Adrian Croft
BRUSSELS, Oct 9 (Reuters) - NATO ministers wrestled on Tuesday with how to prevent austerity-driven defence cuts in many member countries from undermining the power of the 63-year-old Western alliance.
Many European countries have cut defence spending in recent years as they try to rein in budget deficits, deepening the gulf in military capabilities between the United States and the other 27 alliance members.
On the first day of a two-day meeting in Brussels, NATO defence ministers were looking at how to make scarce defence dollars go further by increasing multinational cooperation and cutting wasteful duplication of effort.
NATO Secretary-General Anders Fogh Rasmussen urged member nations to commit to increasing defence spending again once the squeeze on budgets eases.
"Once our economies recover, we must increase our investment in defence once again," Rasmussen told reporters at the start of the meeting. "Because security is the basis of prosperity. Some argue that we cannot afford it. But I say that we cannot afford to be without it."
NATO diplomats say it is unrealistic to expect any increase in defence spending soon although the pressure on alliance budgets may ease slightly once the NATO-led combat mission in Afghanistan finishes at the end of 2014.
Ministers turn to Afghanistan on Wednesday, when they are expected to give military experts the go-ahead to draw up detailed plans for a NATO-led training mission that will start work in Afghanistan in 2015 once combat operations end.
The United States has made little secret of its frustration with declining European defence spending and European deficiencies were laid bare during last year's NATO bombing campaign in Libya, when the Europeans had to rely on the United States in key areas.
One NATO answer to the cash shortage has been "smart" defence. This means more cooperation between alliance members to reduce wasteful duplication of equipment and to enable members to access to capabilities they could not afford on their own.
NATO allies are working on 24 multinational programmes and more are in the works. One example is a "universal armaments interface" to enable fighter jets to use munitions from various sources and nations.
Experts say the proposed merger of Franco-German dominated EADS and Britain's BAE Systems could encourage governments to standardise weapons and equipment.
Rasmussen avoided expressing an opinion on the merger, whose future hung in the balance on Tuesday, but said he favoured restructuring Europe's defence industries to make them more competitive.
Another idea debated by ministers was whether NATO's own central pool of funds could be used to help develop shared multinational capabilities. NATO's central military budget, made up of contributions from member states, totals 1.45 billion euros this year, about a third of which is spent on operations.
"As the level of activity in our operations goes down, the question arises what do you do with this money?" said a senior NATO diplomat, speaking on condition of anonymity.
The diplomat suggested some of the funds could be spent on training to make sure NATO nations keep the operational edge they have acquired by working together for years in Afghanistan.
Ministers were also planning to discuss results of a study measuring the effectiveness of each country's defence spending.
(Additional reporting by Sebastian Moffett, Claire Davenport, Justyna Pawlak. Editing by Sebastian Moffett and Jason Webb.)