UPDATE 2-Hungary moves to make banks soften terms on FX and forint loans
* Government submits legislation to tackle toxic loans
* Tackles FX spread, unilateral interest and fee rises
* Spans both foreign currency and forint loans
* Later conversion into forints to be mandatory -PM Orban
* Government could discuss sharing costs of conversion (Updates with details of legislation, market reaction, analyst comment)
By Krisztina Than and Gergely Szakacs
BUDAPEST, June 27 (Reuters) - Hungary's government moved on Friday to reduce bank charges on foreign currency mortgages, submitting legislation to parliament that could also help people with similar concerns about their forint loans.
The bill is the first step of a comprehensive relief scheme for Hungarians struggling to manage the foreign currency loans that were once popular for their low interest rates but turned sour when Hungary's forint weakened.
Prime Minister Viktor Orban confirmed that the government plans to resolve the problem of households' foreign currency loans by forcing banks to convert them into forints, which could be completed as soon as this year.
"The net impact of this legislation seems to be more unfavourable for both the bank system and OTP (Bank) than previously expected," said Akos Kuti, an analyst at brokerage Equilor.
The move to change the law follows a Supreme Court ruling that banks had used some unfair practices in charging for both foreign and local currency loans, such as unilateral rises in interest and fees.
Ruling Fidesz party lawmaker Antal Rogan has said the bill could be passed by July 4, before the summer recess.
At 1322 GMT, the forint traded at 309.23 versus the euro, weaker than levels before the legislation was published. Shares in OTP Bank were 0.5 percent higher, underperforming the wider market, which gained 0.6 percent.
The draft posted on parliament's website says the exchange rate spread applied in foreign currency loan contracts - the practice of banks using different rates when disbursing loans and when calculating monthly repayments - was void.
It orders a recalculation of spreads within 90 days of the law taking effect, based on the central bank's exchange rates.
The bill also declares unilateral interest and fee rises in loan contracts, for both forint-denominated and foreign currency loans, unfair and void unless banks challenge this provision and prove their right within tight deadlines.
Before the bill was published, analysts had estimated the potential cost of the package at about or over 400 billion forints ($1.76 billion), putting it on a par with a 2011 relief scheme that cost banks about a billion euros ($1.4 billion).
"The bill seems very wide-ranging and is only the first step on the 'fairness' process of redressing contract and marking issues with debt contracts. As such it remains impossible to make a sensible calculation of the specific costs of the bill," said analyst Peter Attard Montalto at Nomura.
"This bill does seem to place a lot of pressure on the banks logistically to examine every contract in a very short period and with such a wide scope."
PM Orban told public radio on Friday that the government would seek to ensure that a conversion of the loans into forints, the second step of the programme to come in the autumn, does not undermine the stability of the banking system.
"The problem of foreign currency loans will be fully resolved when we make the conversion of the loans into forints mandatory under certain conditions, and this way foreign currency loans will disappear from Hungarian life," Orban said.
While the measures will again hit the bank sector, they could also remove a long-standing problem that has haunted Hungarians for years, causing grave economic problems.
The government would not share the costs of compensation, but could discuss sharing the cost of converting the loans.
"When we discuss the phasing out of foreign currency loans, when the conversion will have to be carried out at some kind of exchange rate - like it was during the final repayment scheme - there we will be able to take into consideration business aspects and aspects of bank stability," Orban said.
He said that he hoped the foreign currency loans' problem would be resolved once and for all, by the end of the year.
Banks in Hungary include units of Belgium's KBC, Austria's Raiffeisen Bank and Erste Bank, Italy's UniCredit and Intesa Sanpaolo, and German-owned MKB Bank. ($1 = 227.20 Hungarian Forints) ($1 = 0.7359 Euros) (Reporting by Krisztina Than and Gergely Szakacs; Editing by Ruth Pitchford)