* Germany, others say Spain does not need financial help
* Spain's budget goals set to be discussed among ministers
* 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 details on bank recapitalisation)
By Annika Breidthardt and Robin Emmott
LUXEMBOURG, Oct 8 (Reuters) - Euro zone finance ministerslaunched their permanent 500 billion euro bailout fund on Mondaybut said Spain, the country widely expected to be first to drawon it, was taking steps to overhaul its economy and did not needa bailout for now.
Arriving at a meeting in Luxembourg also set to discussGreece and differences over how to recapitalise Europe's wobblybanks, German Finance Minister Wolfgang Schaeuble said Madridhad made clear it wanted no assistance.
"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.
As well as Spain's broad financial needs, Monday's meetingwas expected to discuss the budget goals presented by Madridlast month, which the European Commission has yet to endorse.
The Commission will publish its twice-yearly economicforecasts on Nov. 7 and some officials have indicated that itmay conclude Spain can't meet its budget targets, which arebased on the economy contracting by just 0.5 percent next year.
The IMF forecast of a 1.2 percent recession may be revisedfurther downwards on Tuesday.
Evidence that Spain can't meet the targets it has set islikely to undermine market confidence and drive up Madrid'sborrowing costs, which are currently hovering around amanageable 5.75 percent. Yields on 10-year bonds above 6 percentfor a sustained period could force a request for help.
"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," Luxembourg's Frieden said.
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 regions requiring a bailout from Madrid.
NO MOVES ON GREECE
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.
Jean-Claude Juncker, the chairman of the Eurogroup, said nodevelopments were likely at least until the troika finishes areport on Athens' debt situation and whether it is survivable.That report is 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.
One of the trickiest issues -- when the ESM rescue mechanismshould be allowed to directly recapitalise banks and how itwould work in practice -- looked set to be left aside, however.
At a summit on June 29, EU leaders agreed that the ESMshould be permitted to pump capital into banks directly once asingle supervisory mechanism under the ECB is in place, possiblyas early as January next year.
But the Netherlands, Finland and Germany disagree on how tointerpret the June 29th agreement, saying that direct bankrecapitalisation should only apply to future problems not"legacy" bad banking debts such as those in Ireland and Spain.
Under such circumstances, direct recapitalisation would nothelp Madrid or Dublin since it would fail to break the linkbetween indebted governments and their indebted banks.
EU leaders will now have to re-evaluate their June 29thagreement when they meet on Oct. 18-19. Most diplomats expectthe original interpretation to stand, meaning the costs of adirect recapitalisation of Spain's banks would not accrue to thegovernment's books, but details remain to be fought over.
With the euro zone countries involved in a lengthy processof trying to define how best to overhaul the monetary union thatbinds them, meetings of finance ministers increasingly involvebroad discussions rather than specific decision-taking.
However, the one 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. It willreach 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/