WRAPUP 6-Europe struggles with rescue fund, may turn to IMF
* Euro zone ministers to agree bailout fund leveraging rules
* Dutch finmin says EFSF falling short, IMF needs to come in
* Italy pays near 8 pct to sell bonds; PM to outline plans
* S&P may cut France's rating outlook to negative-report
* ECB fails to fully offset euro zone bond purchases
By Jan Strupczewski and Valentina Za
BRUSSELS/MILAN, Nov 29 (Reuters) - Euro zone ministers struggled to ramp up the firepower of their rescue fund and looked to the IMF for more help on Tuesday after Italy's borrowing costs hit a euro lifetime high of nearly 8 percent.
Two years into Europe's sovereign debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, deposits are draining from south European banks and a looming recession is aggravating the pain, fuelling doubts about the survival of the single currency.
Italy had to offer a record 7.89 percent yield to sell 3-year bonds, a stunning leap from the 4.93 percent it paid in late October, and 7.56 percent for 10-year bonds, compared with 6.06 percent at that time.
The yields were above levels at which Greece, Ireland and Portugal applied for international bailouts, but European stocks and bonds rallied in apparent relief at the strong demand, with the maximum 7.5 billion euros sold.
"In an ideal world, these yields ... would serve to give the Ecofin/Eurogroup a sense of added urgency, but this is a far from ideal world," said Peter Chatwell, rate strategist at Credit Agricole in London.
The euro had earlier dipped on a report in business daily La Tribune that ratings agency Standard & Poor's would lower its outlook on France's AAA credit rating to negative within 10 days, dealing a potential body blow to the euro zone's ability to rescue heavily indebted countries.
LOOKING TO IMF IF EFSF FALLS SHORT
In Brussels, Eurogroup ministers were expected to approve detailed plans to bolster their bailout fund to help prevent contagion in bond markets, but looked set to fall short of market expectations.
Ministers said the International Monetary Fund may have to provide more help, possibly bolstered with more European money.
"We will have to look at the IMF which can also make available additional funds for the emergency fund. I think countries in Europe and outside of Europe should be prepared to give more money to the IMF," Dutch Finance Minister Jan Kees de Jager told reporters.
The ministers will agree details of leveraging the European Financial Stability Fund (EFSF) so it can help Italy or Spain should they need aid, although worsening market conditions mean it is likely to fall short of the original 1 trillion euro target.
The report about France's credit rating came at a delicate time. Paris is the second largest guarantor of the EFSF bailout fund, and one of only six AAA states in the euro zone. S&P declined comment.
Officials said the leveraging mechanisms could become operational in January, but that may be too late.
"We have talked about leverage though private money, but it would be two or two and a half times an increase so not sufficient and we have to look for other solutions to compliment the EFSF and that in my mind will be the IMF," de Jager said.
With Germany opposed to the idea of the European Central Bank providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets and the ECB shows no sign yet of responding to widespread calls to massively increase its bond-buying.
One option EU sources said is being is explored is for euro system central banks to lend to the IMF to aid Italy and Spain.
"We will discuss with the ECB. The ECB is an independent institution, so we will put on the table some proposals and after that it is for the ECB to take the decision," Belgian Finance Minister Didier Reynders told reporters.
The ECB failed for the first time since May to fully offset 203.5 billion euros in euro zone government bond purchases, adding to fears that the debt crisis is ratcheting up stress on the bloc's banking sector.
A Reuters poll of economists showed a 40 percent chance of the ECB stepping up bond-buying with freshly created money within six months, something it has opposed.
The poll forecast a 60 percent chance of an ECB rate cut to 1.0 percent next week and a big majority of economists said they expect the central bank to announce new long-term liquidity tenders to help keep banks afloat at its Dec. 8 meeting.
MONTI TO UNVEIL HIS PLANS
New Italian premier Mario Monti was to outline his fiscal and economic reform plans to the Eurogroup of 17 euro zone finance ministers amid reports, officially denied in Rome and Washington, of a possible impending approach to the IMF.
Italy has a 1.9 trillion euro debt pile - equivalent to 120 percent of national output - and needs to refinance some 340 billion euros of maturing debt next year with big redemptions starting in late January. It has promised to balance its budget in 2013 but Tuesday's auction suggested it will struggle to keep borrowing costs under control without international help.
Italian daily La Repubblica said EU Economic and Monetary Affairs Commissioner Olli Rehn would tell euro zone ministers that Italy needs to introduce extra fiscal measures worth 11 billion euros immediately to meet its target.
The euro zone ministers are also set to release a long-delayed 8 billion euro loan instalment for Greece, vital to stave off bankruptcy in December and buy time for negotiations on an uncertain second bailout programme for Athens.
Most analysts say more profound measures are now needed, most involving more action from the ECB and an agreement eventually to issue common euro zone bonds, something Germany has opposed.
Berlin has pinned its efforts on a drive for closer fiscal integration among euro zone members.
German Chancellor Angela Merkel will not make a deal at a Dec. 9 European Union summit to stop resisting joint issuance of euro zone bonds in exchange for progress on strengthening fiscal rules, German MPs quoted her as saying.
She told a closed-doors meeting Europe was "a long way from euro bonds", suggesting they may not be ruled out forever.
For now, Germany and France are pressing for coercive powers to reject euro zone members' budgets that breach EU rules, alarming some smaller nations who fear the plans by-pass mechanisms for ensuring equal treatment.
Berlin and Paris aim to outline proposals for a fiscal union before the EU summit that is increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.
Poland's Foreign Minister Radoslaw Sikorski made an appeal for Germany to show more leadership in the crisis.
"You know full well that nobody else can do it," he said in a speech in Berlin on Monday evening.
"I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe's indispensable nation."
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