UPDATE 1-France's Lagarde sees improvement in markets-report

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MILAN, May 18 (Reuters) - There is a "significant improvement in the functioning of the market and in the financial situation of banks," French economy minister Christine Lagarde told Il Sole 24 Ore newspaper in comments published on Sunday.

Lagarde, speaking to the newspaper at a conference in San Gallo on Saturday, added that the Financial Stability Forum should finalise its recommendations in October.

"A swift reaction is certainly needed. An example of that is the collective action of the central banks," Lagarde said.

French President Nicolas Sarkozy has repeatedly pressed the European Central Bank (ECB) to take measures to halt the rise of the euro, which in April hit a new record high against the dollar.

Lagarde added that rushed regulation should be avoided. "An important characteristic of this phase is that you try to work a lot with the market players," she told Il Sole 24 Ore.

French banks have already made all the set-asides they need to, Lagarde added.

Last week, Credit Agricole (CAGR.PA: Quote, Profile, Research, Stock Buzz) pledged 5 billion euros ($7.74 billion) of asset sales and confirmed plans for a 5.9 billion euros rights issue, responding to damage from the global credit crunch.

Its Calyon unit had a first-quarter writedown of 1.2 billion euros due to credit market problems. (Reporting by Jo Winterbottom)