UPDATE 1-EU's Rehn, France back lifeline for banks
* Moscovici, Rehn support using ESM to help banks
* At Brussels meeting, both back banking union
* Moscovici says Paris committed to 2013 deficit goal (Recasts; adds quotes from France's Moscovici)
By Robin Emmott
BRUSSELS, June 4 (Reuters) - France and the European Commission signalled their support on Monday for an ambitious plan to use the euro zone's permanent bailout fund to rescue stricken banks, as European officials try to reassure investors they can contain an escalating crisis.
Senior EU officials have promised firm decisions at a summit at the end of June to resolve the 2-1/2 year debt saga, to deepen integration in the euro and underpin the common currency, showing they are committed to its future.
With Spain's indebted banks the most pressing problem, French Finance Minister Pierre Moscovici said on a visit to Brussels that using the ESM rescue fund to directly capitalise banks was "a fundamental issue" that France would push at the summit.
EU Economic and Monetary Affairs Commissioner Olli Rehn, who met Moscovici for talks, said he was now "considering this as a serious possibility", although he said the ESM's treaty does not allow direct bank funding and leaders needed to work out how to overcome that.
Germany, the euro zone's biggest economy and the biggest contributor to the European Stability Mechanism, has so far opposed any use of bailout funds without a country having to submit to a politically humiliating austerity programme imposed by the EU and the International Monetary Fund.
But Spain's banking problems - the result of a burst property bubble aggravated by recession - and uncertainty about Greece's survival in the euro zone, have given renewed urgency to the need to protect the wider European economy.
"Regarding the need for direct recapitalisation of banks by the ESM, it's a fundamental issue on which proposals are on the table and on which I hope progress will be made at the EU summit," Moscovici told reporters.
While politically complex, Rehn said Europe needed to break the link between struggling banks and governments. He said a European system for overseeing and managing the banking sector would also be critical, something Moscovici said that Paris also supported.
"We are now moving on in the discussion on the possible ways and means to create a banking union," Rehn said.
A banking union would combine national deposit guarantee schemes at the European level, a fund to close or salvage failing banks and some centralisation of supervision.
Although EU leaders now want to go further with integration, euro zone member countries still have some way to go to meet their existing obligations - such as aiming for tight budget deficits.
Moscovici said Paris was committed to reaching its budget goals for next year.
The Commission warned France last week that it risked missing its deficit target of 3 percent of economic output in 2013 if it did not take further steps, sending a message to new French President Francois Hollande that his growth agenda faces severe constraints.
"I want to convince (our EU partners) how serious we are about the credibility of our programme," Moscovici said. "It's feasible and achievable for us to reach 3 pct in 2013 and balance in 2017. I told (our partners) that not only is it achievable, but it will be achieved." (Additional reporting by Catherine Bremer in Paris; editing by Stephen Nisbet)