* Valls hands in government’s resignation after internal criticism
* Montebourg says he and other leftists will not seek new roles
* Crucial moment for future reforms, 2015 budget (Adds lawmaker comment)
By Ingrid Melander and Alexandria Sage
PARIS, Aug 25 (Reuters) - French President Francois Hollande on Monday called for a cabinet reshuffle, evicting from his government rebel leftist ministers who had argued for an economic policy U-turn away from budgetary rigour.
The surprise move - which risks deepening the confrontation between Hollande and more left-wing lawmakers - came a day after outspoken Economy Minister Arnaud Montebourg attacked euro zone powerhouse Germany for ruining the region’s economy with what he called an “obsession” with economic austerity.
Montebourg did not wait for Prime Minister Manuel Valls to announce a new cabinet, which he is scheduled to do on Tuesday, before stepping up his attacks and declaring he and two other left-wing ministers would not seek roles in it.
“The whole world is begging us to put an end to these absurd austerity policies which are burying the euro zone deeper and deeper in recession and which will soon end up with deflation,” he told a news conference at the French finance ministry.
“We must have the intellectual and political courage to acknowledge that austerity policies are making deficits worse instead of narrowing them,” Montebourg said before walking out of the room to the applause of his staff.
It will be the second change of government by the unpopular Hollande in as many years in office and comes barely five months after a first reshuffle intended to promote a more pro-business line. Critics called for new elections and the newspaper Le Monde titled its editorial “The Last Chance of the President”.
The fate of Montebourg, who has long argued that deficit-cutting should not be a priority with stagnant French growth and unemployment stuck at over 10 percent, had been sealed early in the day with a terse statement from Hollande’s office.
“The head of state asked (Prime Minister Manuel Valls) to form a team that supports the objectives he has set out for the country,” said the statement issued after Valls presented his government’s resignation to the president.
Hollande’s objectives are to revive the euro zone’s second- largest economy with tax cuts while slowly reining in its public deficit by trimming spending.
France has lagged other euro zone economies in emerging from a recent slowdown, fuelling frustration over Hollande’s leadership, both within his Socialist party and further afield.
Montebourg said fellow left-wingers Benoit Hamon and Aurelie Filipetti, who hold the education and culture portfolios respectively, were also stepping down. Filipetti separately signalled she did not want a post in the new government.
Hollande’s decision to part company with Montebourg, viewed as a potential presidential rival, raises the risk that the ousted minister could take with him enough rebel lawmakers to deprive the president of the parliamentary majority he needs to implement reforms.
While Montebourg told TF1 television that he still backs the government, self-proclaimed rebel Socialist lawmakers said nothing was excluded and announced they would step up efforts to change the government’s economic policies.
“There is an interesting convergence” of views with Montebourg, one of the leading rebel lawmakers, Laurent Baumel, told BFM television, calling Montebourg’s eviction a mistake that would shrink support for the government.
Opposition conservatives, who for weeks have been embroiled in their own leadership rows, called for an outright dissolution of parliament, as did the far-right National Front.
“With half of the presidential mandate already gone, it doesn’t bode well for the ability of the president, or whatever government he chooses, to take key decisions,” said former Prime Minister Francois Fillon, one of handful of hopefuls for the conservative ticket in the 2017 presidential election.
“The big question with this reshuffle is whether Francois Hollande will still have a parliamentary majority,” Frederic Dabi of pollster Ifop told i>Tele.
In a confidence vote in April, Valls’ government scored 306 votes - above the 289 votes needed for an absolute majority - with the help of smaller allied parties.
The first test will be the 2015 budget, with a draft bill due to be presented next month and voted by end-December.
A new survey released at the weekend showed Hollande’s poll ratings stuck at 17 percent, the lowest for any leader of France since its Fifth Republic was formed in 1958. Valls, a once-popular interior minister, saw his own popularity eroded by his failure to tackle unemployment, which is above 10 percent.
Hollande has sought to repair ties with German Chancellor Angela Merkel’s conservatives that have been strained by France’s repeated failures to meet budgetary targets agreed with the Brussels-based European Commission.
Speaking at a meeting of Socialists in eastern France on Sunday, Montebourg said deficit-reduction measures carried out since the 2008 financial crisis had crippled euro zone economies and urged governments to change course swiftly or lose their voters to populist and extremist parties.
The irony of the timing of Montebourg’s comments is that EU policymakers have in recent weeks acknowledged the bloc’s rules on budget consolidation should be followed with flexibility, while France this month conceded that stagnant growth meant it would miss its 2014 budget target.
ECB chief Mario Draghi last week eased the focus of his euro zone policy away from austerity towards reviving growth, urging governments in a speech to do more to boost demand and hinting at European Central Bank action.
Germany, France, Italy, Spain, Portugal, Ireland and others saw their bond yields hit all-time lows on Monday in response to his remarks, as speculation grew the ECB was preparing new asset purchases to counter wilting inflation. (Additional reporting by Maya Nikolaeva, John Irish and Julien Ponthus; Writing by Mark John; Editing by Larry King)