UPDATE 2-G20 talks focus on policy clarity, global rebalancing
* Fed stimulus withdrawal eyed, clarity sought from China
* G20 backs OECD report on tax dodging
* Jobs debate puts spotlight on Europe
* Street protest after Russian opposition leader jailed
MOSCOW, July 19 (Reuters) - The world's economic crisis response team grappled on Friday with the prospect of more market volatility resulting from powerhouses the United States, China and Japan charting a course towards recovery.
Finance ministers and central bankers from the Group of 20 nations, gathered in Moscow, were expected to call for greater clarity in policy 'messaging' after signals of a withdrawal of U.S. monetary stimulus caused a global sell-off in stocks and bonds, and a flight to the dollar.
G20 sources said a draft communique in the works would also urge China to encourage demand-driven growth and allow greater exchange-rate flexibility as part of wider efforts to rebalance the global economy.
"There has been a kind of over-reaction of the markets," French Finance Minister Pierre Moscovici said. "So we are looking for the balance."
The G20 also backed a fundamental tax rethink that takes aim at the loopholes used by multinational firms and responds to widespread anger among voters hit with higher tax bills to cover soaring national debts.
The forum took the lead in the 2008-09 financial crisis and now faces a multi-speed global economy in which only the United States appears to be nearing a self-sustaining recovery.
China, for years the engine of global growth, is suffering a slowdown amid doubts over the stability of its financial system, Japan has only recently embarked on a radical fiscal and monetary stimulus experiment, and Europe's economy is more stop than go.
Chairman Ben Bernanke's announcement that the Fed may start to wind down its $85 billion in monthly bond purchases sparked a panicky sell-off, particularly in emerging markets.
Investors were calmed by testimony to Congress this week by Bernanke, who is not coming to Moscow, though he said the exit plan from money-printing remained on the cards.
Clearer policy communication is "crucial for preventing serious volatility on financial markets", said Russian Finance Minister Anton Siluanov.
Negotiators working on a joint communique reconvened after a drafting session on Thursday night that sources said was less fraught than at the February G20 meeting in Moscow, when there was talk of a currency devaluation war.
Ministers will review the text over dinner.
The BRICS emerging markets caucus - Brazil, Russia, India, China and South Africa - also met on Friday. They were unlikely to progress on joint steps, such as a shared pool of forex reserves, to guard against capital flight.
The United States is beating its fiscal targets thanks to improving growth and Washington has urged the G20 to prioritise growth over fiscal consolidation sought by Europe's largest economy, Germany.
G20 labour ministers, who met on Thursday, held a joint session on Friday with finance ministers, putting the jobs crisis in Europe - where youth unemployment is nearly 60 percent in debt-strapped Greece and Spain - at the centre of the debate.
"Getting people back to work must be top of the agenda," U.S. Treasury Secretary Jack Lew wrote in an article for the Financial Times. "In many parts of the world, such as Europe, growth is too weak to drive job creation."
The European Union's employment commissioner, Laszlo Andor, shared Lew's prescription for recovery, telling Reuters that investment in jobs was vital for maintaining social peace and emerging from years of austerity.
"If in the name of competitiveness and internal devaluation you just compress wages constantly, you also kill demand and you can kill the recovery," Andor said.
The G20 released a tax action plan drawn up by the Organisation for Economic Co-operation and Development (OECD) that said the existing system didn't work, especially when it came to taxing companies that trade online.
The tax plan is one of the major 'deliverables' that will go before the summit of G20 leaders being hosted by President Vladimir Putin in St Petersburg in early September.
PROTEST IN MOSCOW
Russia, the first big emerging nation to host the annual presidency of the G20, finds itself in an awkward political spot following the flight of former U.S. spy agency contractor Edward Snowden to Moscow.
G20 delegates arriving at Sheremetyevo airport may not have bumped into Snowden, who has requested asylum in Russia, but they ran into a protest in Moscow over the jailing on Thursday of a prominent Russian opposition politician.
Alexei Navalny, who organised protests against Putin's election for a third Kremlin term last year, was sentenced to five years in prison for theft in a case that drew international condemnation as politically motivated.
Navalny was released on bail on Friday pending an appeal.
Officials checking in to the five-star Ritz Carlton hotel on Moscow's central Tverskaya Street paid little attention to thousands of Navalny supporters protesting outside, in keeping with a G20 tradition of keeping politics and policy separate.
"The rally and the traffic jams are causing meetings to be postponed," said one European diplomat. "But we fully understand the democratic right to protest."