UPDATE 1-EU set to warn Germany over gaming market

(Adds background, second source)

BRUSSELS, Jan 24 (Reuters) - The European Commission is set to step up legal action against Germany next week for thwarting foreign competition in the country's gaming markets, sources with knowledge of the decision said on Thursday.

"The decision is expected to be adopted by the Commission next Thursday," a source familiar with the legal action said.

A source from the gaming industry added: "There were no objections to the move in yesterday's preparatory meeting."

A new German law came into force on Jan. 1 that bans online gaming and betting, except on horse racing.

Europe's online gaming industry last week condemned the ban on Web gambling as unlawful and urged the Commission, the EU's executive arm, to overturn it.

"The Commission is expected to open a new legal action with a letter of formal notice against Germany over the new law and could well drop the old legal action it started last year," the gaming industry source said.

EU Internal Market Commissioner Charlie McCreevy wants to crack down on hurdles to cross-border competition in services, a core part of the 27-country European Union's single market. McCreevy started a legal action against Germany last year over its gaming laws.

The new legal action could end up in the European Court of Justice, where Germany could be fined and forced to change its laws to comply with EU rules.

The Commission has complained that Germany failed to notify Brussels properly about the new law.

The European Gaming and Betting Association said the German ban directly contravened EU law on the free movement of services and urged the Commission to take swift action.

McCreevy has launched proceedings against about 10 EU countries for stifling competition in their gaming or lottery sectors. He has drawn support from several rulings by the European Court of Justice, the bloc's top court. (Reporting by Huw Jones, editing by Dale Hudson)