* Germany, others say Spain does not need financial help
* No progress on Greece likely until troika report completed
* Euro zone to discuss direct recapitalisation of banks
* Permanent, 500 bln euro rescue fund formally inaugurated
(Adds ministers' comments, changes DATELINE, previous BRUSSELS)
By Jan Strupczewski and Annika Breidthardt
LUXEMBOURG, Oct 8 (Reuters) - Euro zone finance ministers delivered a united defence of Spain on Monday, saying the country was taking steps to overhaul its economy, funding itself successfully in the financial markets and did not need a bailout, at least for now.
Arriving at a meeting in Luxembourg to discuss Greece and Spain and to inaugurate the euro zone's permanent bailout mechanism, the ESM, German Finance Minister Wolfgang Schaeuble said Madrid had made clear it wanted no help.
"Spain needs no aid programme. Spain is doing everything necessary, in fiscal policy, in structural reforms," he told reporters as he arrived for a gathering that will also discuss plans to establish a single supervisor for euro zone banks.
"Spain has a problem with its banks as a consequence of the real estate bubble of the past years," he said. "That's why Spain is getting (EU) help with banking recapitalisation."
Luxembourg Finance Minister Luc Frieden took the same line but added that if Spain were to make a request for aid beyond the 100 billion euros already earmarked to recapitalise its banks, it would be examined.
"I think we should deal with such a request when it comes, but so far the Spanish government is undertaking reforms which go in the right direction," he said.
Finance ministers agreed in June to provide up to 100 billion euros for Spain's banks, many of which are weighed down with bad property loans and need to be recapitalised.
An independent audit has shown the banks need around 40 billion euros, less than originally expected, a result Austria's finance minister, Maria Fekter, said was positive.
"We have the banking application from Spain," Fekter said. "We are likely to hear today that this 100 billion euros is not all needed, that Spain needs significantly less."
Many in the financial markets are convinced Spain will not be able to meet its sovereign funding needs at an affordable cost without euro zone and European Central Bank support, especially with several of its regions requiring a bailout from Madrid.
A euro zone source said ministers may also discuss Spain's 2013 budget, outlined last month, which the International Monetary Fund and the European Commission both believe is based on an over-optimistic forecast of a 0.5 percent economic contraction next year. The IMF forecast of a 1.2 percent recession may be revised further downwards on Tuesday.
NO MOVES ON GREECE
As well as Spain, ministers will discuss the situation in Greece, where intense negotiations continue between the government and the 'troika' of inspectors from the Commission, the ECB and the IMF over budget cuts for 2013-2014.
But Jean-Claude Juncker, the chairman of the Eurogroup, said no developments on Greece, which has fallen behind on its second bailout programme, were likely at least until the troika finishes a report on the country's debt situation. That report is now expected in early November.
"I don't think that we will have any major decisions on Greece," Juncker said. Asked whether a decision on Greece could be expected soon, he replied: "Hope never dies."
Monday's meeting will also discuss plans for the ECB to be given responsibility for supervising all eurozone banks and the idea of creating a single budget for eurozone countries, issues that will be discussed further by eurozone and EU leaders at a summit in Brussels on Oct. 18-19.
But little formal progress is expected, with questions unresolved about how many of the eurozone's 6,000 banks the ECB will be charged with overseeing and whether it will be able to start its new role from January next year.
Instead, the only firm action taken on Monday was the unveiling of the European Stability Mechanism (ESM), a 500 billion euro, rescue mechanism for the 17 euro zone countries.
The ESM, which replaces the temporary EFSF, will be used to lend to distressed euro zone sovereigns in return for strict fiscal and structural reforms that aim to put economies that have lost investor trust back on track.
"The start of the ESM marks a historic milestone in shaping the future of the European monetary union," the fund's chief executive, Klaus Regling, told reporters
"The euro area now is equipped with a permanent and effective firewall, which of course is a crucial component in our strategy to ensure financial stability in the euro zone."
The fund's lending capacity will be based on 80 billion euros of paid-in capital and 620 billion of callable capital, against which the ESM will borrow money on the market to lend it on to governments cut off from sustainable market funding.
From Monday it has a capacity of 200 billion euros and it will reach its full capacity gradually by 2014.
(Additional reporting by Eva Kuehnen, Robin Emmott, John O'Donnell and Luke Baker in Luxembourg, writing by Luke Baker, editing by Paul Taylor)