(Adds Merkel quotes, EU budget plan, French treaty vote)
* 11 countries back financial transaction tax * Britain, Sweden, free-marketeers strongly oppose * Greek police battle protesters as Merkel visits Athens * French lawmakers endorse fiscal discipline treaty By John O'Donnell and Harry Papachristou
LUXEMBOURG/ATHENS, Oct 9 (Reuters) - Eleven euro zonecountries agreed on Tuesday to press ahead with a disputed taxon financial transactions aimed at making traders share the costof fixing a crisis that has rocked the single currency area.
The initiative, pushed hard by Germany and France butstrongly opposed by Britain, Sweden and other proponents of freemarkets, gained critical mass at a European Union financeministers' meeting in Luxembourg, when more than the requirednine states agreed to use a treaty provision to launch the tax.
Commonly known as a "Tobin tax" after Nobel-prize winningU.S. economist James Tobin proposed one in 1972 as a way ofreducing financial market volatility, it has become a politicalsymbol of a widespread desire to make banks, hedge funds andhigh-frequency traders pay towards a wrenching debt clean-up.
"This is a small step for 11 countries but a giant leap forEurope," Austrian Deputy Finance Minister Andreas Schieder said."The way is now clear for a just contribution from the bankingand financial sector for financing the burdens of the crisis."
The deal raised the prospect of a pioneer group of Europeanstates for the first time launching a joint tax without theunanimous backing of the 27-nation bloc, a move that mayfragment the Union's single market for financial services.
It comes as EU leaders are contemplating creating a separatebudget for the 17-nation euro zone alongside the common EUbudget, according to leaked conclusions drafted for a summitnext week -- another step towards a "two-speed Europe".
EU Tax Commissioner Algirdas Semeta called the transactiontax a source of new revenue from an under-taxed business sector,and a means of encouraging more responsible trading.
However, critics say it could distort the EU's single marketby giving financial companies incentives to shift their tradingactivities to European financial centres where the tax is notlevied - or away from Europe altogether.
"People will arbitrage it. People will find a way aroundit," said David Stewart, CEO of London-based hedge fund firmOdey Asset Management, which manages around $6.5 billion.
"If someone really wants to buy a company that's good, I'msure they'll keep on buying it. But if it's a syntheticderivative then they may go somewhere else ... More volume willgo through London."
Britain, home to the region's biggest trading centre, willnot join the scheme.
Austrian Finance Minister Maria Fekter said the 11 countrieswould present a model for how the tax would work by the end ofthe year, and it was realistic to expect the tax to beimplemented by 2014.
Semeta said countries aiming to launch the tax did not yetagree where the proceeds should go or how they should be spent.
"Some of them would like to spend it individually. Someprefer to use part of the proceeds to finance the EU budget. Itis premature to say what will be the final outcome," he said.
The breakthrough was a surprise to many EU diplomats who hadthought Germany might fail to convince sufficient countries tojoin the plan, which has been in the works for two years.
After heavy diplomatic pressure from Berlin, Spain and Italyagreed to support the measure, as well as Slovakia and Estonia.
The European Commission has said a tax on stocks, bonds andderivatives trades from 2014 could raise up to 57 billion euros($74 billion) a year if applied across all EU countries.
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The agreement was a victory for German Chancellor AngelaMerkel on the day she travelled to Athens, epicentre of Europe'sdebt crisis, to express her support for near-bankrupt Greecestaying in the euro zone.
Greek police fired teargas and stun grenades to hold backtens of thousands of protesters who accused Merkel of imposingdevastating austerity on their country in exchange for twoEU/IMF bailouts that have so far failed to turn the shatteredeconomy around.
"I have come here today in full knowledge that the periodGreece is living through right now is an extremely difficult onefor the Greeks and many people are suffering," Merkel said at ajoint news conference with Prime Minister Antonis Samaras notfar from the mayhem on Syntagma Square, outside parliament.
"Precisely for that reason I want to say that much of thepath is already behind us," she added, offering a public displayof support to fellow conservative Samaras and histhree-month-old government on her first visit to Greece since2007.
In another step towards closer euro zone integration, theFrench parliament voted for a law to ratify a German-drivenEuropean budget discipline treaty which Socialist PresidentFrancois Hollande had opposed while in opposition.
Despite a revolt by a handful of anti-austerityleft-wingers, Hollande secured a majority of his own Socialistparty and allies without having to rely on conservativelawmakers to ratify a text he says has been softened by theadoption of European measures to promote growth.
The 17 euro zone ministers finally inaugurated their 500billion euro permanent rescue fund on Monday, but danced aroundthe question of how soon it might have to be used.
Ministers insisted Spain was taking the right actions torestore its public finances and did not need a bailout for now,even though many in the financial markets are convinced Madridwill need help within weeks rather than months.
The International Monetary Fund doused several euro zonecountries' budget plans, including those of Spain and France, byrevising down its 2013 growth forecasts for their economies.
Euro zone peers told Spanish Economy Minister Luis deGuindos that his country's budget cuts should take into accountthe weakness in the economy as regional policymakers debatedwhether to let Madrid slacken the pace of its austerity drive.
Of the IMF's forecasts for Spain, de Guindos said: "The onlything I can say is to try to avoid that they happen.
"Logically, we are working on the basis that such negativeforecasts are not met," he said.
The ministers also had a "robust" discussion with the IMFabout the long-term sustainability of Greece's debt mountain --a key factor in whether international lenders release anurgently needed next tranche of aid to Athens.
An IMF director told a Dutch newspaper that Europeancountries should consider restructuring the Greek debt they holdif the country's financial burden proves unsustainable.
Diplomats say euro zone governments would prefer to findways to give Athens more time to meet its fiscal targets andpostpone any consideration of official debt restructuring untilafter next September's German parliamentary election.
European Central Bank chief Mario Draghi told the EuropeanParliament the euro zone economy faced a long, uphill road torecovery and the bloc was still suffering a crisis ofconfidence.
But he said there was no alternative to continued budgetcuts.
(Additional reporting by Eva Kuehnen in Luxembourg, JanStrupczewski and Luke Baker in Brussels, Noah Barkin in Berlin,Renee Maltezou and Andreas Rinke in Athens and Laurence Fletcherin London Writing by Paul Taylor; Editing by Mike Peacock andAlastair Macdonald)