UPDATE 1-Dutch shun financial transaction tax
* Fresh blow for Franco-German push for levy
* Netherlands warns tax would hurt economic growth
* Calls for alternatives
AMSTERDAM/BRUSSELS, March 21 (Reuters) - The Netherlands has rejected a proposed financial transaction tax, dealing a fresh blow to a Franco-German bid for a levy to replenish government coffers hit by the financial crisis.
Support from the Netherlands, one of the few euro zone countries with a top-notch credit rating and which has sided with Germany on key economic policy issues in the past, is crucial to implementing the plan.
But in a letter to the Dutch parliament, Finance Minister Jan Kees de Jager called for "less market-disturbing alternatives with less risks for economic developments, such as a financial activity tax, a European coordinated bank tax or a stamp duty similar to the British example."
France and Germany are struggling to rally support for a tax on transactions such as buying and selling shares or bonds, an idea which has already been rejected by the United States.
De Jager warned that financing costs would rise "because higher returns will be demanded to compensate for the FTT (Financial Transactions Tax)."
"A waterfall effect arises because certain financial transactions between institutions, via brokers and clearing members, will all be taxed," de Jager said, adding that the effective tax rate could climb to 1 percent, cutting Dutch economic growth by up to 1.2 percent over the long run.
A European Commission blueprint calls for a tax on stock, bond and derivatives trades from 2014 that could raise up to 57 billion euros.
London, the region's biggest trading centre, would likely be hardest hit by the plan. But the Netherlands, home to some of Europe's largest option trading houses, also stands to lose out.
Britain has already said it will stop any such pan-European tax, prompting Germany to raise the prospect of introducing the charge in the 17-country euro zone where it is dominant.
But with the Netherlands reluctant and others in the euro zone sceptical about the merits of the tax, that option now appears unlikely.
Germany's Finance Minister Wolfgang Schaeuble recently appeared to signal that he was open to alternatives, pointing to banks' exemption from sales tax.
The plan has become intertwined with many other debates about reforming finance.
High-frequency trading - computer-generated split-second transactions - could be reduced by the tax. But de Jager said curbing the risks of those trades would be better dealt with by regulation.
Much of the momentum for the debate comes from public distrust of banks and similar groups after the financial crisis.
The tents of Occupy Frankfurt, an anti-bank protest movement that sprung up in the shadow of Occupy Wall Street, are still on the lawn outside the European Central Bank in Germany.
Failure to make progress on the issue will be embarrassing to the French and German governments, which have attempted to show leadership in Europe throughout the financial crisis.
Political leaders in Germany, which has national elections next year, and France, where two rounds of presidential elections take place in April and May, believe the tax will please voters.
German Chancellor Angela Merkel has repeatedly signalled that she wants a result by March and finance ministers are likely to discuss the issue when they meet in Copenhagen later this month.
France is set to introduce its own tax, which resembles Britain's stamp duty on share trading.
The Commission's proposal is to tax stock and bond trades at the rate of 0.1 percent and derivatives trades at 0.01 percent.
Britain's stamp duty of 0.5 percent on share trades raised almost 3 billion pounds in the financial year to April 2011.
Even if Britain were to opt out, trades carried out in London could be affected.
As the proposal stands, it is the location of the individual or bank buying or selling the asset that triggers the tax. If there is any link to the EU, either through the buyer or seller, then the tax will fall due.
Any pan-European plan needs the backing of all 27 member states to become law, although a smaller scheme is possible.