UPDATE 1-Spain doesn't need help, euro zone ministers say

* Germany, others say Spain does not need financial help

* No progress on Greece likely until troika report completed

* Euro zone to discuss direct recapitalisation of banks

* Permanent, 500 bln euro rescue fund formally inaugurated

(Adds ministers' comments, changes DATELINE, previous BRUSSELS)

By Jan Strupczewski and Annika Breidthardt

LUXEMBOURG, Oct 8 (Reuters) - Euro zone finance ministersdelivered a united defence of Spain on Monday, saying thecountry was taking steps to overhaul its economy, funding itselfsuccessfully in the financial markets and did not need abailout, at least for now.

Arriving at a meeting in Luxembourg to discuss Greece andSpain and to inaugurate the euro zone's permanent bailoutmechanism, the ESM, German Finance Minister Wolfgang Schaeublesaid Madrid had made clear it wanted no help.

"Spain needs no aid programme. Spain is doing everythingnecessary, in fiscal policy, in structural reforms," he toldreporters as he arrived for a gathering that will also discussplans to establish a single supervisor for euro zone banks.

"Spain has a problem with its banks as a consequence of thereal estate bubble of the past years," he said. "That's whySpain is getting (EU) help with banking recapitalisation."

Luxembourg Finance Minister Luc Frieden took the same linebut added that if Spain were to make a request for aid beyondthe 100 billion euros already earmarked to recapitalise itsbanks, it would be examined.

"I think we should deal with such a request when it comes,but so far the Spanish government is undertaking reforms whichgo in the right direction," he said.

Finance ministers agreed in June to provide up to 100billion euros for Spain's banks, many of which are weighed downwith bad property loans and need to be recapitalised.

An independent audit has shown the banks need around 40billion euros, less than originally expected, a result Austria'sfinance minister, Maria Fekter, said was positive.

"We have the banking application from Spain," Fekter said."We are likely to hear today that this 100 billion euros is notall needed, that Spain needs significantly less."

Many in the financial markets are convinced Spain will notbe able to meet its sovereign funding needs at an affordablecost without euro zone and European Central Bank support,especially with several of its regions requiring a bailout fromMadrid.

A euro zone source said ministers may also discuss Spain's2013 budget, outlined last month, which the InternationalMonetary Fund and the European Commission both believe is basedon an over-optimistic forecast of a 0.5 percent economiccontraction next year. The IMF forecast of a 1.2 percentrecession may be revised further downwards on Tuesday.


As well as Spain, ministers will discuss the situation inGreece, where intense negotiations continue between thegovernment and the 'troika' of inspectors from the Commission,the ECB and the IMF over budget cuts for 2013-2014.

But Jean-Claude Juncker, the chairman of the Eurogroup, saidno developments on Greece, which has fallen behind on its secondbailout programme, were likely at least until the troikafinishes a report on the country's debt situation. That reportis now expected in early November.

"I don't think that we will have any major decisions onGreece," Juncker said. Asked whether a decision on Greece couldbe expected soon, he replied: "Hope never dies."

Monday's meeting will also discuss plans for the ECB to begiven responsibility for supervising all eurozone banks and theidea of creating a single budget for eurozone countries, issuesthat will be discussed further by eurozone and EU leaders at asummit in Brussels on Oct. 18-19.

But little formal progress is expected, with questionsunresolved about how many of the eurozone's 6,000 banks the ECBwill be charged with overseeing and whether it will be able tostart its new role from January next year.

Instead, the only firm action taken on Monday was theunveiling of the European Stability Mechanism (ESM), a 500billion euro, rescue mechanism for the 17 euro zone countries.

The ESM, which replaces the temporary EFSF, will be used tolend to distressed euro zone sovereigns in return for strictfiscal and structural reforms that aim to put economies thathave lost investor trust back on track.

"The start of the ESM marks a historic milestone in shapingthe future of the European monetary union," the fund's chiefexecutive, Klaus Regling, told reporters

"The euro area now is equipped with a permanent andeffective firewall, which of course is a crucial component inour strategy to ensure financial stability in the euro zone."

The fund's lending capacity will be based on 80 billioneuros of paid-in capital and 620 billion of callable capital,against which the ESM will borrow money on the market to lend iton to governments cut off from sustainable market funding.

From Monday it has a capacity of 200 billion euros and itwill reach its full capacity gradually by 2014.

(Additional reporting by Eva Kuehnen, Robin Emmott, JohnO'Donnell and Luke Baker in Luxembourg, writing by Luke Baker,editing by Paul Taylor)

((jan.strupczewski@thomsonreuters.com)(+32 2 287 68 37)(ReutersMessaging: jan.strupczewski.reuters.com@reuters.net))

Keywords: EUROGROUP/