EXCLUSIVE-US won't challenge Europe on IMF-Paulson

(Recasts; adds quotes, details, background)

WASHINGTON, July 2 (Reuters) - Treasury Secretary Henry Paulson indicated on Monday the United States will not challenge a long-standing tradition of Europe selecting the head of the International Monetary Fund, but said Washington wants the candidate to be of "real stature."

Having just picked former U.S. deputy secretary of state Robert Zoellick to head the World Bank, Paulson said the United States was in no position to change the unwritten custom of the top IMF post going to a European and that of the World Bank to an American.

"We are very much in the listening mode and I want to see an outstanding leader," Paulson told Reuters in an interview following the surprise resignation last week of IMF Managing Director Rodrigo Rato for personal reasons.

"I'm just going to be encouraging my counterparties around the world to select candidates that are going to be leaders of real stature that will be highly regarded in capitals around the world," Paulson added.

The resignation of Rato has reignited a politically charged debate over who should run the two leading financial agencies.

The United States and Europe are their biggest shareholders but developing countries are seeking a greater voice in the decision-making of the institutions and want their leaders to be selected on merit, not nationality.

"We have a long history in terms of how we're doing these things," Paulson said, adding that the United States had consulted widely on Zoellick, who took the reins of the World Bank on Monday following the resignation of Paul Wolfowitz in an ethics scandal.

Rato is departing before completing a string of IMF reforms he launched in September 2005 to strengthen the way the fund monitors the world economy and to give emerging market economies larger voting rights, which would give them more say in the running of the IMF.

Paulson said those reforms must continue if the institution wants to remain relevant in a world where economies like China and India are a growing force.

"I believe (the IMF) needs to be proactive if they are going to continue to be relevant," said Paulson, a former executive at Wall Street firm Goldman Sachs. "In the private sector, financial institutions change with the markets and with the world or they lose their relevance and cease to exist."

Paulson said he would expect Rato's successor to keep making progress on IMF reforms, especially overseeing the world's exchange rate policies such as China's.

In a major step last month, the IMF agreed to increase its scrutiny over member countries' currency policies, a measure China refused to support.

Some critics accused the IMF of doing Washington's bidding in its feud with China over the value of the Chinese currency.

Paulson said the IMF should play a larger role in convincing China to ease its grip on the renminbi.

"Do I think the IMF should play a role? Of course," Paulson said, adding that China's economy had become more integrated in the world economy in terms of goods and services, but not when it came to letting market forces determine the value of its currency.

"And, that is the elephant in the living room," Paulson said. "We need to think about this in a broader context and continue to make progress and that is all realistically you can ask of the IMF or any other organization," he added.