* Foreclosure freeze threatens banks - finance minister
* Lawmakers fear backlash from austerity-hit homeowners
* Coalition government fragile with thin majority
ATHENS, Aug 17 (Reuters) - Greece will lift restrictions on home foreclosures to allow banks to recover bad loans, the finance minister said on Saturday, adding fuel to a row that may test the cohesion of its fragile coalition government.
Cash-strapped banks are currently barred from auctioning most first homes owned by delinquent borrowers, under a temporary measure introduced in 2010 to protect austerity-hit households.
The freeze on forced auctions, which has already been extended three times and is set to expire on Dec. 31, should not be extended any further, technocrat finance minister Yannis Stournaras said.
“If auctions aren’t liberalised, then banks will collapse,” he was quoted as saying by weekly newspaper Realnews.
The European Union and the International Monetary Fund, which have spent about 38 billion euros ($50.67 billion) between them to rescue Greek banks, are pressuring Athens to take measures to clean up lenders’ balance sheets.
But several lawmakers from the country’s two-party ruling coalition oppose foreclosures, fearing a backlash from home-owners amid record joblessness and plunging wages.
“People will take their shotguns... a collapsing property market is better than a civil war,” said lawmaker Sophia Voultepsi, from the conservative New Democracy party of Prime Minister Antonis Samaras, earlier this month.
Another 11 lawmakers from New Democracy and its junior coalition partner, the Socialist PASOK party, are pushing for the freeze to be extended, newspaper Eleftherotypia reported.
Stournaras said on Saturday there would be provisions to protect the poor. “There will be social and economic criteria to protect the really needy”.
Samaras’s government has only a five-seat majority in the country’s 300-seat parliament. Any rift could cause its collapse and derail Greece’s international 240-billion euro bailout.
Property foreclosures have already triggered protests in other indebted, crisis-hit European countries such as Spain.
Greece’s auction freeze currently covers first homes worth less than 300,000-495,000 euros, depending on whether owners are married and have children.
Home ownership is high in Greece where about eight out of ten people live within their own four walls.
Mortgages account for a large part of Greek banks’ sour loans, which have risen to 29 percent of the total after the country’s six-year recession. ($1 = 0.7500 euros) (Reporting by Harry Papachristou)