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UPDATE 1-Merkel rival Schulz attacks her "zig zag" German car policy

(Adds proposal for rejigging existing subsidies, Schaeuble comments)

BERLIN, Aug 15 (Reuters) - Angela Merkel's main challenger in next month's German election criticised the chancellor's approach to carmakers on Tuesday and called for them to pay for the widening emissions scandal.

The future of the auto sector, Germany's biggest exporter and provider of some 800,000 jobs, has become a hot election issue as politicians blame executives and each other for the sector's battered reputation after Volkswagen admitted to cheating U.S. emissions tests almost two years ago.

Social Democrat Martin Schulz, who is taking on Merkel in the Sept. 24 election, said she had repeatedly changed her views on the need to develop electric cars and the continued use of diesel vehicles, raising questions for unions and consumers.

"The zig zag course of Mrs. Merkel has unsettled unions and has left it unclear that those who caused this crisis will be held responsible," said Schulz, who leads the Social Democratic Party (SPD) that is the junior partner in Merkel's coalition.

Merkel defended her approach during a campaign rally in the northern city of Cuxhaven on Tuesday, saying it was important to both support the auto industry and cut pollution in German cities.

Finance Minister Wolfgang Schaeuble told an event hosted by the Handelsblatt newspaper that he favoured stronger regulation of the car industry, but gave no details. He said the industry had made serious mistakes and must accept the consequences.

Schulz welcomed belated government support for his proposal on Friday to introduce electric car quotas in Europe, which Merkel initially said was not well thought out.

But he said he did not understand Merkel's abrupt switch to support a ban on diesel cars in an interview on Monday, a move that he said would harm consumers and automotive industry workers in the near term.

German politicians and car bosses agreed this month to overhaul engine software on 5.3 million diesel cars to cut pollution after cities around the world took action to ban them.

"Consumers need certainty that they will not be made to pay for the mistakes of the carmakers and their wheeling and dealing with political organisations, or even agencies of the German government," Schulz said.

He also criticised German carmakers for "sitting on a high horse because they think their closeness to Chancellor Merkel will protect them" and said a second diesel summit offered an opportunity to address the outstanding issues.

Merkel has said she will participate in the next summit if, as expected, she wins the election. She was on vacation during the previous summit in early August.

The head of Germany's Federal Office for Economic Affairs and Export Control, Andreas Obersteller, told the Rheinische Post newspaper that the German government could shift some 200 million euros in incentives available for electric car purchases to encourage construction of more charging stations.

The government had seen fewer than expected applications for the total 600 million euros in electric car purchase incentives available through mid-2019, freeing up an estimated 200 million that could be used elsewhere, Obersteller said. (Reporting by Andrea Shalal, Joseph Nasr, Tom Koerkemeier and Reuters TV; editing by Alexander Smith/Mark Heinrich)