* Scaled down tax would avoid embarrassment of none at all
* Several market activities expected to be exempt
* German finance minister hints at phased-in approach
By Huw Jones
LONDON, Feb 17 Germany and France will lead a face-saving bid this week to revive a flagging project to tax financial transactions in 11 euro zone countries and allay fears it could hamper economic recovery.
The tax is expected to be scaled back from an original plan to introduce it from January to raise 35 billion euros ($48 billion) annually to make banks pay back some of the money received in the 2007-09 financial crisis.
The idea of a transaction tax failed to win backing globally due to U.S. opposition, and a pan-European Union tax or even one covering all 18 euro zone countries also found no support. Britain, Ireland, the Netherlands and Sweden are among countries that have opposed it on grounds that it would encourage banks and finance firms to relocate trading activities.
Although the levy is likely to end up being a shadow of the original proposal, its introduction in some form would allow Germany and France to claim a victory.
The latest plan for the tax is expected to be on the agenda when Germany and France meet in Paris on Wednesday.
Soundings among all the 11 countries will first be taken on the sidelines of the regular monthly meeting of the EU finance ministers in Brussels on Monday.
"I hope that we take a step forward on that," Wolfgang Schaeuble, Germany's finance minister said when arriving in Brussels ahead of the planned talks.
"We may possibly have to move ahead step by step," he told journalists, in an apparent reference to a phased introduction of the tax.
An EU diplomat said finance ministers from the 11 countries taking part will meet on Tuesday morning, adding that no definitive decisions are expected this week.
A phase-in starting with stocks and then later adding bonds, and perhaps derivatives in a reduced way, now looks likely rather than the "big bang" introduction originally foreseen, officials and financial lobbyists in Brussels said.
The basis of the tax could also be changed to avoid trying to force countries outside the 11 taking part from having to collect the levy.
What is now seen as an inevitable scaling back has raised concerns among the socialists in the European Parliament, which goes to the polls in May, who urged the French and German finance ministers to be more ambitious.
"Dear ministers, we count on you to reject the special pleading of vested interests and to do what is right for our citizens and the sustainability of a robust financial sector," the socialists' letter seen by Reuters on Monday.
The bloc's tax commissioner, Algirdas Semeta, who drafted the original proposal, has urged the 11 countries not to dilute the plan and instead implement it more gradually.
He welcomed this week's meetings to revive the project.
"We would hope that the result will be a political push forward on the financial transaction tax that we've been pressing for," his spokeswoman said.
Britain, the EU's biggest financial centre, is not among the 11 countries, but is nevertheless challenging the plan in the bloc's top court, saying it impinges on its firms.
The original proposal to tax stocks, bonds and derivatives hit the rocks after it was deemed illegal in parts by lawyers for the member states collectively.
Exemptions to the tax are already under discussion, including some categories of derivatives.
France is keen to scale back the tax's impact on derivatives as French banks such as Societe Generale and BNP Paribas are big players in the market.
Securitised debt and repurchase agreements or repos may also need exemptions to avoid harming what is hoped will be an important source of funding for companies, documents seen by Reuters have said.
Government and corporate bonds may also be exempt and some countries are also keen to avoid hitting end investors and pension funds.