UPDATE 1-Italy's budget at risk of breaking EU rules, France squeezes through
* France's reforms make only limited progress, Commission says
* New approach aims to coordination policy and avoid crises
BRUSSELS, Nov 15 (Reuters) - Italy and Finland's draft budget plans for 2014 are at risk of breaking European Union rules, while French, Spanish and Dutch draft plans barely make it, the European Commission said on Friday.
It is the first time that the European Union's executive arm reviews the main assumptions of draft budgets of euro zone countries before they are submitted to national parliaments so as to assess if they are in line with EU laws.
The Commission has the right to ask for a revised budget plan from a euro zone country if its draft clearly breaks EU rules, which oblige governments to cut deficits until they reach budget balance or surplus and cut debt.
Some leeway on reaching budget balance can be allowed for countries that have deficits already below the EU ceiling of 3 percent of gross domestic product, their debt is falling, they have low economic growth and spend on investment.
Italy, the euro zone's third biggest economy, wanted the Commission to apply such approach to its 2014 budget plans, but the Commission refused, because Italy's public debt is rising rather than falling.
"There is a risk that the draft budgetary plan for 2014 will not be compliant with the rules," the Commission said in a statement. "In particular, the debt reduction benchmark in 2014 is not respected," it said.
The Commission said that the euro zone's second biggest economy France had taken the recommended steps to reduce its budget gap below 3 percent in 2013, and its 2014 draft budget is in line with EU budget rules, but with no margin for error.
Also, France's structural reform plans made only "limited progress", the Commission said.
Other countries at risk of breaking the EU rules were Finland, Luxembourg and Malta. Spain, the Netherlands and Slovenia have, like France, draft 2014 budgets constructed in a way that leaves them no margin for error.
The Commission said it would start disciplinary steps against Croatia for running too high a budget gap and step up the disciplinary action, called the excessive deficit procedure, against Poland for not doing enough to cut its deficit.
The Commission will set 2015 as the new deadline by which Warsaw must bring its budget deficit below the EU ceiling of 3 percent of gross domestic product.
"Poland has not taken effective action in 2013," the Commission said.
"Poland is set to miss the general government deficit target for 2013 ... and has also not adopted the required amount of consolidation measures," it said.
"While in 2014 the headline target is likely to be met, this is due to a large extent to a one-off transfer of pension funds' assets, which does not guarantee a sustainable correction in the following years," it said.