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UPDATE 2-Europe considers euro zone budget, pooling borrowing

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* Report charts path for tighter integration in euro zone

* Paper from EU's Van Rompuy recommends central budget

* Report suggests countries pool short-term funding

* Van Rompuy says no clear-cut concept yet on budget

(Adds comments by Van Rompuy in Helsinki)

By Luke Baker and John O'Donnell

BRUSSELS, Oct 12 (Reuters) - Euro zone states shouldconsider clubbing together to borrow as well as paying into acentral budget that could be used to help struggling peers,according to a report prepared for a meeting of EU leaders.

The interim report charts a path towards closer fiscalintegration among the 17 countries using the euro as theystruggle to contain an economic crisis. It was prepared byHerman Van Rompuy, who as president of the European Council willchair a European Union summit next week.

In the interim paper, obtained by Reuters on Friday,officials write of the need to explore a central budget forcountries in the euro zone.

Van Rompuy's thinking - firmly backed by Germany - is thatsome form of "fiscal capacity" among the euro-area countrieswould allow them to iron out labour market and othersocio-economic imbalances that build up in the bloc.

The fund could be used to help a country such as Spain,which has unemployment of 25 percent and is struggling toreinvigorate growth. In exchange for budget rigour, the pan-eurozone fund could provide targeted assistance.

"One of the functions of such a new fiscal capacity would beto facilitate adjustments to country-specific shocks byproviding for some degree of absorption at the central level,"officials wrote.

The 27 countries in the European Union currently finance abudget which amounts to around 130 billion euros a year - 1percent of EU output - and which is used for spending onagriculture, science, infrastructure and other areas.

But there is no equivalent budget among the 17 countriesthat share the euro, a shortcoming that many economists believehas undermined the stability of the currency project.

EURO T-BILLS?

Germany and France strongly support the proposal and, in asurprise to many EU diplomats, Britain does too, but fordifferent reasons. London sees a euro zone budget as a way offurther separating Britain and its increasingly EU-scepticalelectorate from the currency bloc and its problems.

Van Rompuy, visiting Helsinki on Friday, said the idea ofthe single euro zone budget would not "imply or necessitatepermanent transfers" from one state to another. But he alsostressed that he was not making any concrete proposals for now.

"I simply propose that we examine further some of theseideas ... Also on the so called euro zone budget ... There isno clear-cut concept to this at this stage."

Prepared in conjunction with European Commission presidentJose Manuel Barroso, the president of the European Central Bank,Mario Draghi, and Jean-Claude Juncker, president of theEurogroup of finance ministers, the report also addresses thecontested idea of pooling country borrowing.

It advocates examining "the pooling of some short termsovereign funding instruments, for example, treasury bills, on alimited and conditional basis". The report is due to befinalised in December.

Such a move in the short term would be viewed sceptically byBerlin, which is reluctant to see weaker euro states piggybackon its economic strength in order to borrow more cheaply.

Berlin may however be prepared to consider such a step inthe distant future after Europe has taken significant stepstowards a tighter political and fiscal union.

Van Rompuy also said in Helsinki the November summit ofEuropean leaders should agree on a future framework for thewhole European Union's budget, acknowledging the difficulty offinding a compromise among the member states.

(Additional reporting by Jussi Rosendahl; Editing by CatherineEvans)

((john.odonnell@thomsonreuters.com)(+32 2 287 68 17 or +32 47569 15 89)(Reuters Messaging:john.odonnell.thomsonreuters.com@reuters.net))

Keywords: EU EMU/REPORT