* Cabinet backs new powers for euro rescue facility
* Merkel must avert rebellion by allies in Sept. 29 vote
* Lawmakers propose giving Bundestag consultation rights
By Sarah Marsh
BERLIN, Aug 31 German Chancellor Angela Merkel's cabinet approved new powers for the euro zone's bailout fund on Wednesday, kicking off a month-long battle to convince sceptical lawmakers in her conservative camp to back measures to stem the bloc's debt crisis.
Concerned that Germany is ceding too much power to Brussels, some members of Merkel's centre-right coalition have threatened to vote against granting more powers to the fund -- the European Financial Stability Facility (EFSF) -- when the Bundestag lower house of parliament meets on Sept. 29.
Should enough conservatives rebel and Merkel is forced to rely on opposition parties to pass the legislation, she could face pressure to dissolve parliament and call early elections, although the chances of that seem slim.
In a sign of how important the current debate in Germany is for investors, news that the cabinet had approved a stronger EFSF pushed the euro up to session highs against the dollar.
There are fears that if Berlin insists on parliament having a greater say in the EFSF, other countries will too, limiting the fund's ability to act swiftly to save stricken states.
Senior German conservatives said on Wednesday that they had come up with a formula for the Bundestag to be consulted on use of the EFSF, which is set to receive new powers to intervene in the bond market and provide precautionary credit lines to troubled member states.
Norbert Barthle, chief budget expert for Merkel's conservative bloc, said this should mollify rebels who want more say for legislators but would not increase the risk of euro zone contagion by bogging down the EFSF in parliamentary procedure.
"I expect this proposal ... will be able to convince those critics who were worried parliament did not have a sufficient say in the funds," Barthle told Reuters, adding that the EFSF should still be able to react quickly in a crisis.
According to his proposal, the Bundestag budget committee would be informed of minor EFSF decisions but there would be a fuller parliamentary consultation in other cases.
Euro zone leaders last month agreed to boost the size of the EFSF to 440 billion euros and give it extra powers, including a potential role in helping to recapitalise banks.
Merkel's conservative coalition has 330 seats in the 620-seat Bundestag. If 20 or more of her allies dissent, she may be forced to rely on leftist opposition parties -- the Social Democrats (SPD) and Greens -- to pass the measures.
The coalition parties themselves will write up the draft and present it to parliament in order to speed up the ratification procedure and ensure the law is passed by the end of September. (Reporting By Sarah Marsh; Writing by Stephen Brown and Noah Barkin; Editing by John Stonestreet)