* Monti wants European rescue funds to lower borrowing costs
* Hollande says idea exploring, sees talks at Rome meeting
* ECB has been sole institution to buy sovereign debt so far
By Noah Barkin and Luke Baker
LOS CABOS, Mexico, June 19 Italy put forward a proposal at a G20 summit in Mexico on Tuesday for the euro zone's rescue funds to start buying the debt of distressed European countries, and the idea is expected to be discussed at a meeting of leaders in Rome on Friday.
The Italian proposal foresees using the EU's rescue funds, known as the EFSF and the ESM, to buy bonds of countries such as Spain and Italy in the secondary market to help bring down bond yields and lower refinancing costs.
Both facilities have the power to buy sovereign debt, but so far only the European Central Bank (ECB) has been active in purchasing the bonds of stricken euro zone countries, snapping up over 210 billion euros worth of debt since launching the programme in May 2010.
"The idea is to stabilize borrowing costs, especially for countries who are complying with their reform goals, and this should be clearly separated from the idea of a bailout," Italian Prime Minister Mario Monti told a news conference in Los Cabos at the end of a G20 meeting.
French President Francois Hollande said no decisions had been taken on using the funds to buy debt, but that the idea was worth exploring and would be discussed at a meeting between him, Monti, German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy on Friday.
"Italy has launched an idea which is worth looking at," Hollande told reporters in response to a Reuters question.
"We are looking for ways to use the ESM for this," Hollande said. "At the moment it is just an idea, not a decision. It is part of the discussion."
Merkel has signaled in the past that the funds could be used to buy bonds, but that is unpopular in Germany and would require the agreement of other euro-zone member states.
The idea was set out by Italy's Europe minister, Enzo Moavero, in Brussels on Monday.
Moavero said the plans would also be discussed at a meeting of finance ministers in Luxembourg on June 21-22.
The 440-billion-euro European Financial Stability Facility and the 500-billion-euro European Stability Mechanism, which comes into force next month, both have the power to buy bonds, but that can only happen with a request from the country in question and involves signing up to a rescue programme.
The ECB has intervened to lower the borrowing costs of countries such as Greece, Ireland, Spain and Italy.
Italy, where 10-year bond yields are hovering just below 6.0 percent, would have a vested interest in such a plan being put into action. Spain, where 10-year yields traded just below 7.0 percent on Tuesday, would also potentially benefit from such a step.
"Secondary market bond purchases are one of many instruments available to the EFSF and ESM," a German government official told Reuters, speaking on condition of anonymity.
But he added: "There was no discussion here in Los Cabos about any concrete initiatives" related to such purchases.
Other officials said a variety of ideas were circulating at the summit, but none of them was set to be put into action soon.
"There is nothing that has been agreed upon," one official said. "This is not a discussion that is going to produce action today or anytime soon."
The final G20 communique referred vaguely to aims to reduce borrowing costs for struggling euro zone countries, as part of moves toward tighter fiscal integration.
"The adoption of the fiscal compact (on budget discipline) and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs," it said.