UPDATE 1-Canada pushes G20 for more forex flexibility

* Canada wants progress on currencies, current accounts

* Says China currency moves should be gradual, not sharp

OTTAWA Nov 5 (Reuters) - Canada wants a G20 summit next week to make more progress on the sensitive questions of currency flexibility and current account balances, a senior government official said on Friday.

Leaders of the Group of 20 rich and emerging nations will hold a summit in South Korea next week amid increasing tensions over foreign exchange rates and fears that a so-called currency war could break out.

Developed countries are upset with China's policy of keeping its yuan artificially low and want Beijing to let it float higher.

And, in recent days, some G20 members criticized the United States for driving down the value of its dollar by announcing a plan to pump more cash into the sluggish economy.

"Canada fundamentally is looking for more progress on the whole question of currencies," the official told a briefing.

Canada also wants the G20 to agree to targets for current account imbalances as a central part of an action plan due to be adopted in Seoul next week.

"We fully support the adoption of a current account target," an official said, but did not give a specific number.

Prime Minister Stephen Harper has sent a letter to his G20 counterparts about "the role played by the persistence of large and unsustainable current account imbalances in deficit and surplus countries", said spokesman Dimitri Soudas.

"In Seoul, we should have a frank discussion on how to narrow these imbalances and facilitate the required rotation in global demand," he quoted the letter as saying.

The officials said the tensions over currencies showed the importance of the G20, an organization that some critics says is too large and divided to work effectively.

"Canada's top priority at the Seoul summit will be to secure agreement on an action plan ... (which) in the short term encourages greater exchange rate flexibility," said Soudas. Another official said Canada did not want large and potentially disruptive moves in the yuan.

"We think in the Chinese context -- domestic as well as international -- that a sustained modest appreciation of their exchange rate is in both their interest and in ours," he said. (Reporting by David Ljunggren and Louise Egan)