Italy centre-left ally says EU must loosen budget rules
* Europe needs expansive economic policies - Vendola
* Monti and Vendola may end up in same government
* Vendola says he has "nothing personal" against Monti
By Steve Scherer and Giselda Vagnoni
ROME, Feb 21 (Reuters) - A leading member of Italy's centre-left coalition, frontrunner in polls for this weekend's election, said on Thursday the country should seek revisions of European Union budget rules.
"We have a duty to renegotiate the fiscal compact," Nichi Vendola, leader of the Left Ecology Freedom party (SEL), told a briefing for foreign reporters. "Europe needs expansive economic policies."
Some investors fear that Vendola will push a centre-left government too far to the left and prevent a coalition agreement with outgoing Prime Minister Mario Monti, which is seen as the most market-friendly election outcome.
He is one of several front-line members of the centre-left bloc who say the fiscal compact, a EU treaty imposing fiscal discipline and balanced budgets, will hamper Italy's recovery from its longest recession in two decades.
Vendola is the main coalition ally of Pier Luigi Bersani's Democratic Party (PD), which had a more than 5 point lead over Silvio Berlusconi's centre-right when a polling blackout ahead of this weekend's election started on Feb. 9.
While Bersani generally has tried to maintain good relations with Monti, Vendola and the prime minister have traded barbs throughout the election campaign.
"Monti's year in government left the country wounded," Vendola said on Thursday. "Austerity must be loosened to restore necessary oxygen to an economy that is out of breath."
Monti helped restore market confidence in Italy with an austerity drive when he was appointed in 2011 to head off a Greek-style debt crisis.
He sharply raised taxes and raised the retirement age to try to put accounts back on track, but the measures further weakened an economy already in recession.
Monti, now leader of a centrist bloc, may end up a Vendola ally after the vote if the centre-left needs help to form a stable majority, despite the attacks during the campaign.
Monti has said Bersani should dump his coalition partner because he will hold up reforms that the euro zone's most sluggish economy desperately needs, while Vendola has accused Monti of stifling growth and driving up unemployment.
"I have no idiosyncratic personal beef with Monti," Vendola said. "If the centre-left is not self-sufficient after the vote, we'll have to see if there is a majority in parliament that supports our agenda."
Bersani has said he will continue along Monti's path of fiscal prudence, while easing the tax burden on workers and pensioners. Monti has said he is willing to ally with "reformist" forces after the election.