UPDATE 3-EU Socialists suggest euro zone rescue fund

* Fund managed by EIB would aim to prevent defaults

* Any such fund might not be in place in time to help Greece

* Aim is to deter speculators from preying on countries

(Adds background)

By Marcin Grajewski

BRUSSELS, March 2 (Reuters) - European Socialists proposed on Tuesday setting up an emergency fund to prevent defaults by euro zone countries such as Greece that run into trouble, but there is scant EU appetite for radical institutional reforms.

The fund would be part of the European Investment Bank (EIB), the European Union's government-owned financing arm which issues bonds to secure cash for projects such as energy or motorway construction, the Socialists said.

The proposal was the latest in a string of ideas on how to overhaul the 16-nation euro zone, which has faced its most serious crisis since its creation 11 years ago due to investor worries over Greece and some other countries that drift apart economically from heavyweights such as Germany.

Diplomats say Greece might be offered a one-off bail-out scheme, but far-reaching, systemic reforms, such as setting up a "European Monetary Fund" or creating an economic government for the euro zone or the EU, are unlikely.

Still, the Socialists insisted on a permanent mechanism to help countries in trouble to complement the repeatedly breached EU budget discipline rules that set the deficit ceiling at 3 percent of gross domestic product.

"The current crisis has revealed the lack of a solidarity mechanism in the EU," said Poul Nyrup Rasmussen, a former Danish prime minister who is head of the Party of European Socialists, an umbrella for left-wing parties.

The group's statement said the fund would stop a "locust swarm of speculators moving from country to country".

The proposal follows reports that France and Germany could be nearing a deal with Greece to help it refinance its ballooning debt in exchange for further commitment from Athens to budget deficit-cutting reforms.

TIRED EU

As for long-term reforms, analysts and politicians are sceptical they would succeed in the EU, which needs unanimity on them and is tired after 10 years of tortuous negotiations before the current Lisbon treaty took effect last year.

Jean-Claude Juncker, who heads monthly meetings of euro zone finance ministers, said last month he did not see the need to reform the EU's budget rules -- the Stability and Growth Pact.

It is doubtful whether the executive European Commission and EU leaders would take up the Socialists' proposal, as it effectively amounts to issuing common EU bonds -- an idea which has gathered little enthusiasm in most EU countries.

The Commission has said it will soon propose deepening economic surveillance among EU countries so that any problems could be detected at an early stage.

But there is little appetite to create a real EU or euro zone economic government, an idea floated by French President Nicolas Sarkozy, as many countries fear that would cede too much power to Brussels or to big, rich member states.

Spain, which holds the EU's rotating presidency, has been forced to drop its proposal to fine countries which do not implement planned reform under the bloc's flagship "Europe 2020 Strategy."

A proposal by the Centre for European Policy Studies think-tank to set up a European monetary fund, a mini-replica of the International Monetary Fund, has been widely discussed among EU diplomats, but with no immediate follow-up.

"I don't think the EU is ready for any radical treaty change, so any reforms are likely to be made step-by-step," said one EU diplomat.

Rasmussen said the Socialists' proposal was unlikely to help Greece as, if accepted by EU and euro zone governments, it would take time for it to be agreed and put in place.

The EU can give financial help to its non-euro zone members through a balance of payments fund, but has no ready instrument to back euro zone countries that are in trouble.

Rasmussen said the fund could be created under a provision of the EU's Lisbon treaty that allows aid for countries "seriously threatened with severe difficulties caused by natural disasters or exceptional circumstances beyond its control".

The very existence of such a fund could calm markets enough for the money never to be used, said a Greek member of the European Parliament, Stavros Lambrinidis.

"It is like in a Western. We need to put a gun on the table, it does not mean we need to use it," Lambrinidis told the news conference. (Editing by Stephen Nisbet)