UPDATE 1-Greek-German tension rises, reflecting wider rift
* Greek resentment mounts
* Reflects north-south divisions
* Greeks believe Germans ready to drop them from euro
By Barry Moody
ROME, Feb 16 (Reuters) - Whether or not Greece secures a new bailout to avoid bankruptcy next month, relations between Athens and Germany look close to breaking point. Their inflammatory exchanges reflect a wider rift between northern and southern Europe.
Greek resentment of pressure from northern creditors led by Berlin is shared in other parts of the south, where a single-minded focus on belt-tightening rather than growth is seen as more likely to worsen the euro zone debt crisis than fix it.
"There are obviously forces within Europe that are playing with fire because they think ... not all the conditions might be met, and that may even want Greece outside the euro zone," Greek Finance Minister Evangelos Venizelos complained on Wednesday.
Exasperation in Germany, the Netherlands and Finland about Greek backsliding on promises and delays in meeting demands for reforms in return for a second international bailout is matched by rising anger in Athens at daily lectures from Berlin.
The resentment, opening wounds dating back to World War Two, burst out when Greek President Karolos Papoulias, an 82-year-old veteran of resistance both to Nazi occupation and a military junta between 1967 and 1974, angrily accused German Finance Minister Wolfgang Schaeuble of insulting Greece.
Schaeuble has twice this week spoken of Greece as a "bottomless pit", causing outrage and fuelling suspicion that north Europeans may be preparing to push Athens out of the euro zone - comforted by calculations that this would no longer destroy the euro.
Even if Athens secures a new 130 billion-euro EU-IMF bailout to avoid a chaotic default in March, the spat between Germany and Greece appears to have raised prospects of more lasting trouble further down the road.
"I cannot accept Mr Schaeuble insulting my country," Papoulis said. "Who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finnish?"
His remarks struck a chord in Greece, where wartime memories are still powerful. Protesters burned a German flag last week and newspapers have published computer-generated pictures of Chancellor Angela Merkel in Nazi uniform.
"It's like going to a doctor with lung cancer and instead of helping you, he is telling you 'Serves you right'," said Tassos Sountris, a 48-year-old businessman in the town of Tripoli in southern Greece.
He said Schaeuble could "awaken long-forgotten syndromes from the war and end up alienating all the peoples of Europe, even France".
A Greek government official, speaking on condition of anonymity, told Reuters: "We are starting to believe Germany wants to kick Greece out of the euro zone. Some recent German statements have been particularly provocative and offensive."
German Foreign Minister Guido Westerwelle called for a moderation of rhetoric.
"I urge the Greek political leaders not to escalate such a debate," he said in a statement. "We cannot accept such criticism of Germany and the leading German negotiators."
German Deputy Finance Minister Steffen Kampeter said the Greek president's remarks showed "there is much nervousness at the moment".
"I point out that European taxpayers are showing great solidarity at the moment in stabilizing Greece economically and politically for the long term. In exchange we ask the Greek side for changes of behaviour and measures to build trust that agreements will be met," he said in a television interview.
EU sources have told Reuters that officials are examining ways of delaying some of the second bailout to Greece until after an election expected in April - reflecting deep mistrust in the commitment of Greek politicians to the deal.
Italian Prime Minister Mario Monti, a former European Commissioner and economist praised by Merkel for his strong measures to handle Rome's own debt crisis, has criticised the north European approach in more measured tones.
He urged the IMF on a visit to Washington last week to be more flexible with Greece to avoid "a big potential explosion".
A few days later Athens was shaken by the most violent riots for years as protesters burned buildings and fought with police.
In a speech to the European Parliament on Wednesday, Monti warned that the debt crisis was fuelling dangerous resentments.
While southern countries were widely blamed for the crisis, France and Germany also bore major responsibility for having first breached and watered down the zone's fiscal rules. "There are no goodies or baddies in the European Union," Monti said.
Some commentators and government officials in Italy have suggested Berlin's fiscal straitjacket for Europe could end up driving southern states into bankruptcy and destroy the euro.
"Are the Germans going to break down Europe for the third time in a century?" one senior Italian government official said, asking not to be named.
It is not only southern Europeans who believe Germany could be preparing to drop Greece from the monetary union.
"Germany appears to be hedging its bets: giving Greece a slim chance to stay in the euro zone while preparing the ground for its possible exit," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
"We believe a tipping point has been reached beyond which Greece's membership of the euro zone is no longer deemed essential, or desirable for that matter," he told Reuters.
Even in Germany there were voices calling for calm and more sympathetic treatment for Greece. "We must not let the tone get out of hand," said Hermann Groehe, deputy leader of Merkel's Christian Democrat party.
Guenter Verheugen, a former European commissioner, told SWR2 radio: "My intuition tells me you can't treat a people as if they were criminals."