UPDATE 2-Clearing key to making derivatives safer - EU

* EU executive says clearing key to cutting derivatives risk

* Standardisation of derivatives contracts urged

* Plans less radical than U.S. push to exchange trading

* Industry groups say accept need for central clearing

* Final proposals by end 2009, possible draft law

(Adds more industry reaction, news conference)

BRUSSELS, July 3 (Reuters) - Derivatives pose risks on financial markets that central clearing of contracts would mitigate, the European Commission said on Friday, outlining plans that fall short of more radical U.S. steps.

EU Internal Market Commissioner, Charlie McCreevy, opened an investigation into the sector last October, a month after the collapse of Lehman Brothers, a bank heavily involved in the global $600 trillion off-exchange derivatives market.

Off-exchange traded derivatives are a vitally important part of the economy but the worst crisis in decades highlights concerns over the "web of mutual dependence" the sector has created, the Commission said.

McCreevy's findings and policy proposals, published on Friday, said contracts should be standardised -- a process already underway -- and a central data depository created to store records of trades.

The plans stop short of more radical steps envisaged by the United States which seek to go beyond centrally clearing over-the-counter trades to shift trading onto exchanges or trading platforms where possible.

"The Commission will further assess the pros and cons of channelling of further trade flow through transparent and efficient trading venues and the appropriate level of transparency -- price, transaction, position -- for the variety of derivative markets trading venues," the Commission's policy document said.

A closer study was needed because forcing OTC trades onto an exchange could deprive consumers of benefits such as the ability to trade large orders, it said.

Dealers breathed a sigh of relief that Brussels was holding back from insisting on exchange trading for now.

The International Swaps and Derivatives Association (ISDA) said those exposed to credit risk should be allowed to choose the type of transaction that best suits them.

"Removing that flexibility, such as by forcing bilateral participants to trade on an exchange or otherwise limiting the availability of customized risk management solutions, would be a step backwards," ISDA said in a statement.