UPDATE 1-Austrian bank levy to stay despite European fund
* Chancellor defends bank levy as legitimate revenue source
* Banks want levy abolished or credited against Europe fund
* Bank sector pays 640 mln eur/yr, faces 170-180 mln EU hit (Adds comment from bank representatives)
VIENNA, April 1 (Reuters) - Austria will keep a levy on banks' balance sheets that raises around 640 million euros ($882 million) a year despite a parallel programme to set up a wind-down fund for ailing euro zone banks, Chancellor Werner Faymann said on Tuesday.
His hard line will be a blow to lenders such as Erste Group , Raiffeisen Bank International and UniCredit Bank Austria, which are not keen to pay levies to both Austria and the euro zone fund.
The Austrian bank tax - set up in 2011 to help recoup funds the state used to bail out lenders during the financial crisis - remains a crucial part of Vienna's efforts to prevent taxpayers from shouldering the entire burden for the sector, Faymann said.
Asked at a news conference whether Austrian banks would have to pay into both schemes, the Social Democrat said this depended on how much the euro zone levy would cost and when contributions would start.
But he added: "This (euro zone) insolvency fund is for the future. The issue of the (Austrian) bank levy is for the past and present, a contribution of the sector that has profited from this (aid)."
He noted the bank levy contributes more than 3 billion euros during each five-year legislative period, money the state can use to help lenders such as nationalised Hypo Alpe Adria , now to be wound down via a "bad bank".
Proceeds from the bank levy flow into general state coffers, to the chagrin of bankers who would like to see the money earmarked for a bank-sector support fund, as in Germany.
"Given the extraordinarily high costs for Austrian lenders there is no leeway for further burdens," Franz Rudorfer, head of the bank and insurance division of the country's powerful Chamber of Commerce, said in a statement.
"The bank levy has to be either abolished or at least credited against the bank wind-down fund," he said, adding that Germany's banking system - 10 times bigger than Austria's - paid only around 500 million euros in such levies in 2013.
He told Reuters the new European fund would cost Austrian banks an estimated 170-180 million euros a year.
European Union policymakers agreed last month on how to set up an agency that would wind down collapsing banks and how to provide it with money to cover the costs of the closure.
The money will come from a fund filled by banks' annual contributions which is to reach 55 billion euros after eight years.
($1 = 0.7256 euros) (Reporting by Michael Shields; Editing by Mark Potter and Pravin Char)