France's Banque Postale doubles muni-loan capacity

* La Banque Postale ups muni-loan capacity to 4 bln euros

* Local govts face lending squeeze after Dexia breakup

* Postal bank and CDC to offer longer-term loans

PARIS, July 7 (Reuters) - France's La Banque Postale said on Saturday it would double its capacity to lend to municipal governments due to a spike in demand for credit, a month after it took over the role from stricken Franco-Belgian Dexia SA .

The state-owned bank inherited part of Dexia's municipal loan portfolio on June 20 after the lender, specialised in local government financing, was broken up in late 2011 amid fears about its exposure to Greek debt.

La Banque Postale had made 2 billion euros ($2.5 billion)worth of loans available to heavily indebted municipal governments but was quickly overwhelmed by demand, the bank said in a statement.

"In order to meet rising demand for short-term credit, La Banque Postale will be able to increase its (loan) portfolio up to 4 billion euros," it said.

Hundreds of French towns, cities and regions have faced a funding squeeze in the wake of Dexia's collapse, when the French government and two state banks including La Banque Postale were forced to take over its municipal loans.

A plan to create a new public bank devoted exclusively to municipal lending, which was meant to be operational on June 20, has been delayed due to opposition from the European Commission, sources told Reuters in June.

As a result, La Banque Postale and another state-owned bank, La Caisse des Depots et Consignations, are being tapped for more loans to finance local government and may expand their range of bonds to medium- and long-term financing.

French Finance Minister Pierre Moscovici sought to ease fears of a financing squeeze.

"The government will make sure that long-term solutions are found, beyond the exceptional measures already put in place by the government," he said in a statement. ($1 = 0.8126 euros) (Reporting by Nicholas Vinocur; Editing by David Holmes)