UPDATE 1-Merkel says will not issue banks blank cheque

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BERLIN, Oct 1 (Reuters) -German Chancellor Angela Merkel said on Wednesday her government was not prepared to issue a blank cheque to any bank although it was determined to limit the economic damage from the global financial crisis.

"The federal government cannot and will not issue a blank cheque for all banks, regardless of whether they behave in a responsible manner or not," Merkel told Bild daily in an interview to be published on Thursday.

Earlier this week, the government said it would provide the bulk of 35 billion euros ($49.51 billion) in credit guarantees in a rescue package for Hypo Real Estate (HRE) (HRXG.DE).

HRE is the fifth German bank to be bailed out by the state in the wake of financial sector turmoil stemming from the United States.

Merkel added that she could understand peoples' anger over the banking crisis and the conduct of bank managers.

"The responsibilities of those people in the economy who have caused this must be worked through," she said.

Merkel also said she wanted better early warning systems in place to prevent a future financial crisis and that she believed a deal could be reached with the United States on changes to financial market regulation.

She noted that the government's role in a rescue package for Hypo Real Estate involved no taxpayers' money but was the granting of a guarantee.

"In truth, this is about limiting the damage for our whole economy in a very serious situation and protecting our citizens' money," said Merkel, noting that German banks were more stable than "elsewhere".

(Reporting by Madeline Chambers, Noah Barkin, Paul Carrel; Editing by Ron Askew)