UPDATE 2-Berlin slams Commerzbank CEO for urging euro zone bonds
* Blessing says common liability already a reality in Europe
* German finance minister, Deutsche Bank head reject bond idea
* Government holds 17 pct stake in Commerzbank after bailout (Adds comments from German government, Commerzbank CEO)
BERLIN, Sept 3 (Reuters) - The German government sharply criticised the head of the country's second-largest lender Commerzbank on Wednesday for suggesting Europe revive the idea of common euro zone bonds, with one official urging him to stick to banking.
Martin Blessing, chief executive of the bank in which the government holds a 17 percent stake, wrote in an opinion piece in German daily Handelsblatt that euro zone bonds would "permanently establish the euro as a globally important currency" and ensure European competitiveness.
Chancellor Angela Merkel repeatedly rejected calls by European partners like France and Italy to introduce such bonds during the height of the euro zone's financial crisis, arguing that they would remove incentives for member states to reform and clean up their finances.
Steffen Kampeter, deputy finance minister and a member of Merkel's Christian Democrats (CDU), swiftly shot down Blessing's idea on Wednesday, saying euro bonds were "totally off the political agenda".
"Instead of occupying himself with an untimely subject like this, Mr. Blessing should concentrate on his role as chief executive," Kampeter said.
Chancellor Angela Merkel's spokesman said at a news conference Germany was not considering common euro zone bonds.
"For us, the issue of eurobonds is not up for debate. The German government's basic position has not changed on this in any way," Steffen Seibert said.
Speaking at a banking conference in Frankfurt, the co-chief executive of Deutsche Bank Anshu Jain also rejected the idea, saying he preferred the "discipline" of individual states issuing debt.
In his newspaper column Blessing said the European Central Bank's (ECB) response to the euro zone debt crisis, and bonds issued by the European Stability Mechanism (ESM) bailout scheme, meant common liability was "already a reality" and that "euro bonds have already been introduced virtually by the back door".
As well as being attractive for investors, Blessing said, a legally-binding framework for such instruments would have the advantage of giving member states "strong incentives for fiscal discipline".
At the same Frankfurt conference where Jain spoke, Blessing elaborated on his comments.
"We feel much better today than three years ago, but not enough has happened (in terms of structural reforms)," he said. "Time has been bought. But is it being utilised?"
"Today investors are betting that there will be a bailout," Blessing said, adding that according to his blue print for euro bonds, governments would be allowed to default again.
Countries should be allowed to issue debt equivalent to 25 percent of their GDP in euro bonds carrying a low, default-risk free coupon, he said. The remainder of the debt would have to be issued in bonds carrying a country's specific credit risk.
"I don't know if there will be majorities supporting these ideas," Blessing said, adding that something needed to be done to avoid policy makers becoming complacent given the current low rates for government borrowing.
Kampeter said that, on the contrary, that sharing liability in the euro zone would exacerbate problems by "reducing member states' incentives to carry out important structural reforms".
Commerzbank was one of the highest-profile casualties of the global financial crisis. The government spent about 18 billion euros bailing out out the bank. (Reporting by Stephen Brown, Michelle Martin and Madeline Chambers in Berlin and Arno Schuetze and Thomas Atkins in Frankfurt; Editing by Dominic Evans)