* Tax breaks eyed to revive flagging home construction
* New housing starts weakest since 1998, weighing on growth
PARIS Aug 29 (Reuters) - The French government is set to unveil plans on Friday to revive the struggling housing sector, its second set of measures in three months and a response to criticisms of policies to date that are seen to have discouraged investment.
Promises in June to slash red tape on home-builders and ease conditions for interest-free loans have done little to reassure a sector which is a big employer in the euro zone's second-biggest economy, and which has been battered by policy switches and uncertainties since it took power in 2012.
With house construction still in decline, the Socialist government has little choice but to increase tax breaks to tackle a chronic housing shortage, even though it cal ill afford them as it struggles to rein in its public deficit.
Among the measures to be announced, the capital gains tax regime on property will be eased in order to encourage owners to free up more land for new homes, according to a government source.
Much to the concern of builders like Bouygues and developers like Kaufman and Broad, new home sales fell by 15 percent in the second quarter over one year, according to the FPI property developers association.
With housing starts at their weakest level since 1998, the sector's slump is also choking economic growth, which stagnated in both the first and second quarters in part because of collapsing household investment in new homes.
Developers and builders say the situation has been worsened by a new law that entered force in March this year, vastly increasing paperwork during home sales and requiring rent limits in particularly tight markets like Paris.
Facing a hail of criticism, the government in June was forced to drop a campaign pledge it would build 500,000 new homes a year, adding to a litany of broken promises that has made President Francois Hollande the least popular president in modern Frend history.
At the same time it pledged to would cut regulations holding back construction and revive interest-free loan schemes for would-be homebuyers.
"A climate of confidence needs to be rebuilt for investors," Bouygues chief executive Martin Bouygues, told journalists on Thursday.
"One of the big problems we have in France is that we have to live with ... tax, legal and social insecurity as each government is constantly changing the rules," he added.
The property developers association says that investors have deserted the market over the last two years. Plans to limit rents in some cities have only added to their concerns.
In response, the government aims to increase tax breaks for property owners who rent out apartments or homes for long periods, according to industry sources.
Housing investment graphic: link.reuters.com/jah69v
French house prices: link.reuters.com/tyx36t