UPDATE 1-UK's Labour tells government: spend 4G money for growth

* Labour says Britain risks lost decade of stagnation

* Labour: Britain needs to drive demand to revive economy

* Opposition would split up banks, hit rich with more tax

* Balls says would not go on a "spending spree" in government

(Recasts, add detail on Balls, colour and quotes)

By Guy Faulconbridge and Matt Falloon

MANCHESTER, England, Oct 1 (Reuters) - Britain's opposition Labour Party told the government to build its way out of recession by using $6.5 billion from the sale of 4G mobile phone licences to pay for new homes, but said there would be no spending spree if it won the 2015 election.

Ed Balls, Labour's finance minister-in-waiting, says Prime Minister David Cameron's coalition government has stalled the $2.5 trillion economy by cutting too far too soon in an attempt to reduce a record budget deficit rather than driving demand.

But Balls, who served as an economic adviser and minister in the last Labour government, ruled out on Monday any pledges to reverse specific tax rises or spending cuts implemented by the government, instead promising a review to evaluate all spending.

"Their economic plan is failing - and they don't know what to do," Balls told Labour's annual conference in the northern English city of Manchester.

"In difficult times, we urgently need to put something back into the economy," Balls told the conference where union leaders rubbed shoulders with lawmakers among stalls selling $1,000 suits and t-shirts featuring socialist icons like Karl Marx.

Balls proposed using as much as 4 billion pounds ($6.46 billion) that 4G licences are expected to fetch to pay for more than 100,000 cheap homes and for freezing a transaction tax on properties worth less than 250,000 pounds, a vote winner for young people who often struggle to buy a home.

Britain's economy is forecast by most economists polled by Reuters to contract this year by 0.3 percent despite official forecasts of 0.8 percent growth this year and a 2.0 percent expansion in 2013.

Balls, one of Labour's most powerful tacticians who is known for taunting Cameron in parliament, said the economic policy crafted by finance minister George Osborne had crashed.

He lambasted the Conservative leader and finance minister as "Butch Cameron and the Flat-line kid," saying they had put Britain on course for a decade of stagnation.

Balls said Britain's economy looked like it might emerge from recession in the third quarter because of a "short term shot in the arm" from the London Olympics, but warned the government lacked strategy for long-term growth.


Britain's coalition government, formed in May 2010, has slashed spending and raised taxes in an attempt to reduce the biggest budget deficit in British history, betting growth would kick in to help ease the pain by the 2015 national election.

But with no growth, the Conservative Party is now at least 10 percentage points behind Labour in polls which suggest the opposition would win power if an election were held tomorrow. The government has also missed its own austerity targets.

"For two years they've told us all this pain will be worth it in the end, that it'll be short-term pain for long-term gain," Balls said.

"What we are now seeing is short-term pain already doing long-term damage," said the 45-year-old former journalist who was educated at Oxford and Harvard and lost a party leadership contest to Ed Miliband in 2010.

The 2015 election will be waged on the state of the economy but Labour strategists are concerned the Conservatives will seek to erode its support by painting it as a high-tax party unable to manage the world's sixth largest economy.

"There will be difficult decisions in the future from which we will not flinch," said Balls in an attempt to project Labour as a party of governance.

Britain's finances remain shaky: Britain's government spent about 126 billion pounds more than it earned in 2011-12, or more than 2,000 pounds per man, woman and child, while its deficit is forecast by the European Union to be higher than any other EU state bar Greece or Ireland next year.

Seeking to tap into public anger at the banks in the wake of the global credit crisis, Labour targeted bankers and the wealthy, arguing for an international financial transactions tax and pledging to reverse an income tax cut for the highest paid.

Balls said he would implement a Miliband promise to split the retail and investment operations at Britain's banks if the coalition government watered down independent recommendations on bank reform, due to be brought in to law before 2015.

He also said a Labour government would use the money from selling off publicly-owned stakes in the Royal Bank of Scotland and Lloyds - bailed out by the previous Labour administration - to pay down Britain's national debt.

(Editing by Andrew Heavens)

((matt.falloon@thomsonreuters.com)(+44 207 542 7947))