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UPDATE 1-No quick breakthrough on expected on EU banking union

(Recasts with French, Dutch finance ministers)

BRUSSELS, March 12 (Reuters) - No quick breakthrough is expected in talks on Europe's banking union, even though the rise of eurosceptic parties in Italy and the threat of a global trade war make deeper integration more necessary, euro zone finance ministers said on Monday.

Euro zone finance ministers are discussing deeper integration of their economies, focusing on banking union and the transformation of the European Stability Mechanism bailout fund into a European Monetary Fund.

The talks aim to prepare a euro zone summit on integration scheduled for March 23. Leaders plan to take key political decisions on the future shape of the euro zone in June.

One element still missing from an EU banking union is deposit insurance for the entire euro zone, which would bolster the confidence of savers and protect deposits of up to 100,000 euros in any euro zone bank.

But Germany, Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, the Netherlands and Sweden say that euro zone banks must reduce their exposure to risks before work on such insurance can begin.

"I don't think we will have a common approach on this tomorrow as there are still too many unsolved questions," Germany's interim finance minister, Peter Altmaier, told reporters on a meeting of euro zone finance ministers.

"We can only make progress if in those countries where there are many bad loans and many unsolved issues remain, the risk of a new banking crisis is reduced," he added.

Some euro zone officials believe risk reduction and risk sharing should be done together. Dutch Finance Minister Wopke Hoekstra would not accept that.

"Risk reduction first, risk mutualisation second," he told reporters.

His view stems from concern that some banking systems, like Italy's, still have too many bad loans. If it were in effect now, deposit insurance would mean German, Dutch and Finnish savers were responsible for Italians getting their savings back - a prospect they don't relish.

But the success of the euro-skeptic Five Star movement in Italian elections and the threat of a global trade war after the United States imposed tariffs on steel and aluminum make faster integration more important, French Finance Minister Bruno Le Maire said.

"When one sees ... the political situation in some European countries and ... the risk of a global trade war which will produce nothing but losers, what are the conclusions?" Le Maire told reporters on entering the talks.

"There is an absolute urgency to move forward with the integration of the euro zone," he said.

Other issues linked to the completion of the banking union include how banks should provide for bad loans and whether to set limits on their holdings of securities of a single government, to make national banking systems less dependent on the fiscal stability of their governments.

That is also politically contentious issue. Limits on the exposure to a particular government could make it harder and expensive for some of them to borrow. (Reporting by Robert-Jan Bartunek, editing by Jan Strupczewski, Larry King)