UPDATE 1-Euro zone to boost crisis fund to 1 trln euros - sources

* Euro zone leaders aim to quadruple emergency fund's firepower

* Leaders eye insurance model, special vehicle for investors

* Final firepower depends on appetite for euro debt, Greek default

By John O'Donnell and Julien Toyer

BRUSSELS, Oct 26 (Reuters) - Euro zone leaders intend to scale up their emergency rescue fund, the European Financial Stability Facility, to give it an estimated firepower of about 1 trillion euros ($1.38 trillion), EU sources said on Wednesday.

The sources said the 440 billion euro EFSF fund would have between 250 and 275 billion euros available after providing aid to Greece, Ireland and Portugal, and that the money could be quadrupled using a special vehicle and a debt-insurance scheme.

"The ratio of the leverage will be of at least four times," one source said, while another said the spare capacity available to be leveraged was up to 275 billion euros.

The final firepower of the fund, designed to convince markets that the euro zone could cope with borrowing problems in Spain and Italy, can only be finalised, however, after finance ministers talk to investors to judge their appetite for European debt.

They will want to see what risk premium cautious investors, ranging from countries like China to fund managers, will demand to buy bonds in the euro zone. That could rise, depending on the scale of losses investors end up shouldering on their Greek debt.

If private-sector owners of Greek sovereign bonds are forced to take heavy losses rather than accepting them voluntarily, investors could be even more hesitant.

Two models are on the table to bolster the fund's firepower.

One would be a type of euro state-sponsored insurance scheme offered to buyers of Spanish bonds, for example, that would make a payout if Spain were to default. Euro zone states hope that by giving this guarantee they could encourage otherwise reluctant investors to buy.

"Purchasing this risk insurance would be offered to private investors as an option when buying bonds in the primary market," according to a draft of a statement by euro zone leaders.

The second model involves setting up a special purpose investment vehicle, giving foreign investors a less risky way to buy euro zone debt.

"The EFSF will have the flexibility to deploy... these two options simultaneously," the draft statement said.

The exact amount of capital available for leverage will only be known once negotiations over a second bailout package for Greece are finalised.

The private owners of Greek bonds may receive an offer to swap their bonds at a discount for new ones backed by a guarantee of the EFSF, similar to the so-called Brady bond scheme used in Latin America.

But that guarantee comes at a cost to the EFSF -- bigger guarantees or credit enhancements will cut the amount of funds in the EFSF for leveraging.

Sony Kapoor, managing director of financial think tank Re-Define and who is close to the discussions on leveraging, said it was far too early to specify the potential firepower of the fund.

"It's good to have targets, but that is all they are," Kapoor said.

"Until they have talked to investors, they will not know what level of guarantees are needed to get Spanish and Italian borrowing costs down to reasonable level," he said.

"The leveraging effect depends on the risk premium investors want to invest in euro zone debt."