UPDATE 1-Euro zone must agree bank recaps on Thursday - EU's Rehn
* ESM bank recap rules still need to be agreed by ministers
* Rehn confident French pension reform will be ambitious
PARIS, June 18 (Reuters) - Euro zone finance ministers must hammer out an agreement at a meeting later this week over how to recapitalise banks, the European Union's top economic official said on Tuesday.
The bloc's leaders agreed in June 2012 that the European Stability Mechanism, which has a lending capacity of 500 billion euros ($667 billion), should be able to directly recapitalise stricken banks if a government is unable to do so.
But the exact rules for such capital injections have so far not been set, with policymakers due to agree a limit on how much money the ESM may use for recapitalisations to ensure that they do not eat into its resources.
"I find it essential that we can agree on the principles and rules of direct recapitalisation of euro area banks in the Eurogroup on Thursday," EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters during a visit to Paris.
A euro zone document obtained by Reuters last week said that the cap on the amount of direct ESM recapitalisations of banks would be set at 50-70 billion euros.
"We are technically, to my mind, ready to agree on the rule for direct recapitalisation," Rehn said. "It of course calls for political will from the member states."
Speaking shortly before an address to French lawmakers, Rehn also voiced confidence that France would carry out ambitious reform of its pension system as demanded by the European Commission, to take into account rising life expectancy.
The European Union's executive arm has called for a pension overhaul and other reforms in exchange for granting France two more years to bring its public deficit down to an EU limit of 3 percent.
"France is on its way to make a convincing pension reform that will help ensure the sustainability of public finances over the medium and long term, which is in the fundamental interest of France and the French people," Rehn said.
While the government agrees it must carry on the reforms, it reacted angrily at the end of last month to the Commission's recommendations on how it could change the French pension system. President Francois Hollande has told the EU executive it could not "dictate" its policies and it was up to Paris to decide how to implement them.
Rehn said the EU executive had simply made "suggestions" but that it was crucial, for France, that the government agree measures that ensure the sustainability of the pension system.
The European Commission has said possible pension reform steps included adapting indexation rules and increasing the statutory retirement age and full-pension contribution period, while avoiding an increase in employers' social contributions.
But Hollande has already played down expectations of a major overhaul, suggesting any move to force workers to contribute for longer will be deferred to 2025 and ruling out a rise in the retirement age from 62.
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