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UPDATE 1-Ireland's Varadkar says would ease new debt target as prime minister

* Favourite for PM to scrap debt target set seven months ago

* Capital spending prioritised, EU allowance sought for more

* Varadkar says may phase out first time home buyer's scheme (Adds quotes, details on deficit, help-to-buy scheme)

DUBLIN, May 22 (Reuters) - The overwhelming favourite to succeed Enda Kenny as Irish prime minister said on Monday he wants a less ambitious debt reduction target than the one set last year, in order to free up more funding for infrastructure projects.

Finance Minister Michael Noonan, who is due to step down next month, pledged last October to cut the state's debt as a proportion of gross domestic product to 45 percent by the mid-2020s or later, depending on the pace of economic growth. The EU limit is 60 percent.

However, Leo Varadkar, who has built up a near insurmountable lead ahead of the June 2 contest to succeed Kenny, according to the support declared so far by his Fine Gael party's lawmakers, said on Monday that he would amend the target to 55 percent of GDP to allow for greater capital investment.

"Essentially what we're saying is that we should meet the European target and we should do better but instead of going all the way down to 45 percent, we should free up more money for capital investment," Varadkar told a news conference.

"Ireland is very different to other European counties, we're young, our population is still growing and we've only become wealthy in the last 10 or 20 years. We need to catch up."

Noonan has consistently pitched the measure as one of the main steps required to ensure the economy and public finances are equipped to cope with the consequences of key trading partner Britain's decision to leave the European Union.

The target was also a response to distorted GDP figures that have flattered the debt ratio. Ireland's debt-to-GDP fell below 80 percent from 94 percent at the stroke of a pen last year when GDP growth for 2015 was adjusted up to 26 percent after a massive revision to the stock of capital assets.

The national debt remains among the highest in the euro zone by most other measures.

The easing of the target marks the first signs of a shift in fiscal policy under a Varadkar government but also acknowledges that far greater investment in infrastructure is needed in the EU's fastest growing economy after capital spending ground to a near halt during the financial crisis.

Varadkar added that he would seek to restore the so-called "golden rule" in Europe, which allows for deficits to be run up for capital investment and treated separately from borrowing for day-to-day spending.

He said that could mean running a deficit of around 0.5 to 1 percent of GDP to fund additional projects, a proposal that will "find a receptive ear around European capitals".

Varadkar said he would also accelerate a planned review of the government's new subsidy for first-time home buyers and that if it was driving up prices, it would be phased out and replaced with incentives for retired people to move out of large homes.

House price growth has begun to accelerate again in Ireland amid a chronic lack of supply, drawing the concerns of EU institutions. (Editing by Alison Williams)