UPDATE 2-Merkel warns euro faces challenging phase

* Merkel says believes Greece will achieve austerity goals

* Zapatero says hopes Germany maintains commitment to EU (Releads after Merkel, Zapatero news conference, adds byline)

Erik Kirschbaum

HANOVER, Germany, March 1 (Reuters) - The euro is facing a very challenging period, German Chancellor Angela Merkel said on Monday, adding she believed Greece would be able to fulfill budget targets designed to restore confidence in the currency.

Speaking at a joint news conference with Spanish Prime Minister Jose Luis Rodriguez Zapatero, Merkel said all euro zone states would be hurt if markets could attack the euro.

"The euro is certainly facing a major challenge. This is about ... fulfilling the Stability and Growth Pact again as quickly as possible," Merkel said, adding budget consolidation was the best way to minimise speculation against the euro.

"Only if the markets make an assessment that gives Greece a good perspective will it be possible for the euro to really enter a period of stability. I think that Greece can manage that," she said.

Signs are growing that diplomatic efforts are under way to help Greece tackle its debt crisis, and EU Economic and Monetary Affairs Commissioner Olli Rehn said earlier the euro zone stood ready to take coordinated action to help Greece.

Greece's prime minister is due to meet Merkel on Friday.

Merkel, under pressure from public opinion and her Free Democrat (FDP) coalition partner, has been reluctant to promise aid to Greece, but given fears about the euro's EUR= stability she may be left with little option.

Investors are concerned about some other euro zone states, including Spain, and Zapatero said he hoped Germany, Europe's biggest economy, would continue to back the European Union project.

"I am grateful to Germany for its commitment to the unifying European Union project," said Zapatero. "We hope that Germany continues with that commitment and conviction in support of the European project," he added, in a thinly veiled appeal.

Germany has repeatedly stressed that Greece must do its own homework and a German government spokeswoman said earlier it was up to Athens to pursue budget consolidation to win the confidence of financial markets.

Asked if German government officials had been in talks with banks about a bailout for Greece, the spokeswoman told a news conference the ball was in Greece's court.

"(Confidence in the euro) can only be achieved if the finance policy challenges in the individual states are tackled," she said.

Germany welcomed Greece's readiness to pursue budget consolidation measures, she said, adding that no aid for Greece would be factored into Germany's 2010 budget.

A German member of the European Parliament, Jorgo Chatzimarkakis, said on Saturday that Germany, France and the Netherlands plan to buy Greek bonds, using state-run banks such as Germany's KfW and France's Caisse des Depots. For more see [ID:nLDE61Q085].

A finance ministry spokesman said increased transparency on credit default swap markets was desirable but that any agreement on this should be reached internationally.

The opposition Social Democrats (SPD) added their weight to those opposing bilateral aid to Greece.

"I am very sceptical about direct aid," said Carsten Schneider, the SPD's parliamentary party's budget spokesman said, adding Germany's long-term credit-worthiness would deteriorate on capital markets if Berlin helped out. (Additional reporting by Brian Rohan and Paul Carrel and Madrid newsroom; Writing by Madeline Chambers; Editing by James Dalgleish)