REFILE-UPDATE 1-Merkel says Europe must achieve "breakthrough"

* Merkel wants changes to Europe's Lisbon treaty

* Says Europe must show it can adapt to changing world

* Former minister Fischer says 27-nation EU too unwieldy

By Andreas Rinke

BERLIN, Nov 9 (Reuters) - German Chancellor Angela Merkel said on Wednesday in some of her most dramatic rhetoric since the euro zone crisis erupted two years ago that it was high time for Europe to achieve a "breakthrough" on changes to its ground rules.

Speaking at a conference in Berlin, Merkel said the situation in Europe had become "unpleasant" and the bloc would not survive unless it showed the world it was capable of adapting to the debt crisis that has intensified in recent weeks, sparking speculation of a euro zone breakup.

Her remarks appeared aimed at winning over sceptical European partners to a German push for changes to the bloc's Lisbon Treaty, rather than a signal that Berlin was ready to consider radical new measures to stem the crisis.

"It is time for a breakthrough to a new Europe," Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive. I'm convinced of this."

"Because the world is changing so much, we must be prepared to answer the challenges. That will mean more Europe, not less Europe."

Italian borrowing costs shot up on Wednesday despite a promise by embattled Prime Minister Silvio Berlusconi to step down. Europe's rescue fund is not big enough to cope with a bailout of Italy and the market moves raised alarm bells across the bloc, with Merkel's spokesman Steffen Seibert admitting they were grounds for concern.

"We are watching developments in Italy with great interest," he said.

The latest turmoil has forced policymakers to consider more radical solutions for solving their crisis. At a G20 summit in Cannes last week, Merkel and French President Nicolas Sarkozy conceded for the first time that Greece might have to leave the 17-nation currency bloc at some point.

Former German foreign minister Joschka Fischer, a longtime supporter of European integration, said in a newspaper interview on Wednesday the 27-nation EU was too unwieldy and that it was time think about forming a smaller group capable of pursuing needed reforms.

Berlin hopes that by taking a rapid leap-forward on the EU's fiscal stability rules, the bloc might win back the confidence of the markets. But even German officials admit that changing the EU treaty could take up to a year on the most ambitious projections.

Some European sources have suggested that more radical steps may be needed if markets cannot be won over soon, including the idea of moving forward with a smaller group of euro zone members.