UPDATE 4-France to back bank loans, offer capital -Sarkozy

(Adds Lagarde quotes, Woerth comment)

By Crispian Balmer and Anna Willard

PARIS, Oct 13 (Reuters) - France has earmarked a maximum 360 billion euros ($490 billion) of funds to prop up its financial sector, guaranteeing new debt an pumping fresh capital into banks if necessary, President Nicolas Sarkozy said on Monday.

The plan builds on a blueprint agreed by euro zone leaders at a summit in Paris on Sunday and Sarkozy's announcement was part of coordinated action around the continent aimed at restoring confidence in the battered markets.

"The French state will not let any banking establishment go bankrupt," said Sarkozy, who has taken a leading role in galvanising Europe into drawing up a comprehensive, pan-national plan to end weeks of financial turmoil.

He said France would use two funding vehicles to help banks.

The first will guarantee bank debt issued before the end of 2009 and for a duration of up to five years, for a total 320 billion euros. Sarkozy said he doubted whether this limit would be reached.

"Money is not circulating any more," he stressed. "It is therefore necessary to create the conditions for it to circulate again and naturally between banks first as they are at the heart of financing the economy."

The second funding vehicle will be run by the state and will have a war chest of 40 billion euros to help recapitalise financial firms that need a boost. Sarkozy will meet bank chiefs on Tuesday to discuss their capital needs.

Economy Minister Christine Lagarde said she was sure French banks would use the fund, adding that she wanted them to be in a position to increase their crucial Tier 1 capital ratios to around 9 percent, as their counterparts in Britain have done.

"I would be astonished if French banks did not request capital so at least they can get on an equal footing with the British banks," Lagarde told reporters.

Sarkozy warned that his government was ready to protect local banks from falling prey to foreign takeovers. "Other initiatives would be taken if that were the case," he said.

France already swung into action last week to rescue Dexia (DEXI.BR)(DEXI.PA), a cross-border Franco-Benelux bank that risked running aground because of the financial crisis.

France, Belgium and Luxembourg pledged to underwrite new borrowing for the world's largest municipal lender just days after the three governments and public bodies pumped 6.4 billion euros ($8.7 billion) into the bank.

Budget Minister Eric Woerth said France was still aiming for a deficit of 2.7 percent of gross domestic product this year, adding that the 40 billion euros of the recapitalisation fund would add to France's public debt pile. (Reporting by Tamora Vidaillet and Francois Murphy, editing by Ron Askew)