* Merkel rules out Greek haircut, leaves open aid option
* Potent issue for chancellor in Sept. 22 election
* Her centre-right coalition loses slender in latest poll
By Madeline Chambers
BERLIN, Aug 25 German Chancellor Angela Merkel
sought to reassure voters on Sunday that Greece would not need a
debt writedown but left open the option of more aid for Athens
as she struggled to contain a dispute which could hurt her in
next month's election.
Finance Minister Wolfgang Schaeuble provoked a storm last
week when he told a campaign rally that a new rescue for Greece
was inevitable in comments that contradicted Merkel, who has
said it is too early to discuss additional aid.
The subject has dominated the election campaign ever since.
Merkel has tried to keep Greece out of her campaign to avoid
angering Germans who fear they will foot the bill for more
bailouts. She is tipped to win a third term in the Sept. 22 poll
partly because voters approve of her management of the euro zone
crisis and her tough line with struggling states.
The chancellor on Sunday did not rule out a further Greek
bailout, saying the euro zone would look again at the situation
in the country in 2014, but she told Focus magazine that she did
not see a debt haircut for Greece.
Asked if she would see things more clearly after the
election, she said: "The election has nothing to do with it. I
am expressly warning against a haircut. It could create a domino
effect of uncertainty ... in the euro zone."
Many Germans are even more concerned about the direct hit
they would take from a debt writedown than a third Greek bailout
which would probably be far smaller than the previous rescues,
though both are unpopular options.
As Europe's largest economy, Germany has the most exposure
to Greece. Merkel could lose out if voters think she is being
less than honest about Greek risks.
Private owners of Greek debt were forced to swallow
significant losses on their holdings last year, but European
governments and the European Central Bank have refused to take a
hit so far. Germany has argued a writedown of Greek debt held by
euro zone governments would be illegal.
A poll on Sunday showed that Merkel's centre-right coalition
had lost its slender lead over parties on the left. If she is
unable to continue her alliance with the Free Democrats (FDP),
she may seek a "grand coalition" with the Social Democrats
Opposition parties, who have long accused Merkel of hiding
from German voters the truth that they will at some point have
to pump more money into the euro zone, have seized on the issue.
Merkel's SPD rival Peer Steinbrueck said he would press her
on the issue in coming weeks, including in a television debate
in a week's time.
"(The government) has handed out sleeping tablets and tried
to hush up the fact that the stabilisation of the euro zone will
have a cost," Steinbrueck told the Suedwest Presse newspaper.
Pollsters, however, say while the issue of Greece is
dangerous for Merkel, opposition parties may not benefit as they
have backed the bailouts in parliament.
On Sunday, Greek Finance Minister Yannis Stournaras said his
country may need a further 10 billion euros in extra support
from its euro zone partners but would not expect any loan to
come with conditions attached.
Analysts have long predicted Greece will need more aid,
albeit on a smaller scale than previous bailouts totalling about
240 billion euros. The IMF estimated last month Greece would
face a funding gap of nearly 11 billion euros for 2014-2015.
Stournaras also ruled out another haircut, the most toxic
question for German voters.
Schaeuble was bombarded by questions on the issue on Sunday
at a news conference with ordinary citizens, as part of a
government "open day".
He once again ruled out a debt writedown but reiterated the
government's stance that Greece's partners would "decide on
further measures" in 2014 if they were needed. "The truth is
that it is highly probably that it will come to that," he said.
ECB Executive Board member Joerg Asmussen, a German, also
warned that a debate about a second debt writedown was damaging.
"The repeated discussion distracts from what must be done
for budget consolidation and more growth under the current
programme," Asmussen told Die Welt am Sonntag weekly.
Some economists, however, think a haircut may be unavoidable
eventually. Germany's commissioner to the European Commission,
Guenther Oettinger, said on Saturday he would not rule it out in
the long run.