Germany softens tone ahead of cruch Greek debt talks

By Jan Strupczewski and George Georgiopoulos

BRUSSELS/ATHENS (Reuters) - European Union paymaster Germany softened its tone on Friday as euro zone finance ministers raced to break a deadlock over Athens' debts.

Hours ahead of the crunch talks in Brussels, a senior Greek official said a deal was close. Germany said Greece's latest proposal was a "good signal" although it did not go far enough in its present form.

The Greek official, speaking on condition of anonymity, said Athens had made a lot of concessions to reach an agreement and the euro zone should show some flexibility too.

"We have covered four fifths of the distance, they also need to cover one fifth," the official said, adding Greece wanted to clinch a deal on Friday, but that it would not back down in the face of pressure from the Eurogroup.

A spokeswoman for German Chancellor Angela Merkel said the latest Greek request for an extension of its loan agreement with Europe was a good signal and provided a basis for further talks, but was not sufficient in its current form.

Spokeswoman Christiane Wirtz however sent a more conciliatory message than Finance Minister Wolfgang Schaeuble had on Thursday, when he rejected the proposal from his Greek counterpart Yanis Varoufakis.

"The letter from the Greek finance minister makes clear that Greece remains interested in support from the European Union," Wirtz said. "This letter is a good signal which allows us to continue to negotiate."

She said the euro zone finance ministers' talks would "hopefully lead to an agreement with Greece."

AUSTERITY

Germany and the new radical leftist-led government in Athens have squared off over demands that Greece stick to strict austerity conditions in its international bailout programme.

The 240 billion euro bailout expires at the end of this month and Greece could run out of money by the end of March without new external funds, people familiar with the figures say, driving it nearer to the euro zone exit.

Adding to pressure to reach a deal, Greek savers withdrew their money from the banks at an accelerating pace despite government assurances that there is no plan to introduce capital controls to stem the outflows.

Deposit outflows rose to over 1 billion euros over the past two days, some of the highest daily levels seen this year, two senior banking sources told Reuters.

Greeks are nervous ahead of a three-day weekend, given memories of capital controls imposed on Cyprus in 2013 over a long weekend, a senior banker said. Monday is a market holiday.

Government spokesman Gabriel Sakellaridis said Greece had done all it could to find a mutually beneficial solution.

"We are not discussing the continuation of the (bailout) programme," he told Mega TV. "The Greek government will maintain this stance today, although conditions have matured for a solution to be found at last."

Greek Prime Minister Alexis Tsipras, elected last month on a platform of scrapping the bailout, says austerity has strangled his country's economy and caused a humanitarian crisis.

Diplomatic efforts to avert a breakdown that could cause turmoil in world financial markets intensified, with German Chancellor Angela Merkel and Tsipras holding their first substantive telephone call on Thursday.

French President Francois Hollande, one of several EU leaders trying to mediate, told Tsipras he would work on Merkel when they meet in Paris on Friday, a Greek official said.

U.S. Treasury Secretary Jack Lew weighed in to urge compromise in calls to his Greek, Dutch and French counterparts.

Washington, sympathetic to Greek demands for an easing of austerity, is worried that a breakdown in talks could affect an already weak global economy.

The German member of the European Commission, Guenther Oettinger, said he believed Greece and its creditors should be able to reach a deal but it might take another meeting of euro zone leaders next week.

"We are working so that Greece stays in the euro zone," Oettinger told Deutschlandfunk radio. "On this basis I think an agreement will still be possible in the next eight days -- if necessary via a further meeting of government leaders."

DEADLINE?

Eurogroup chairman Jeroen Dijsselbloem has said this Friday is the deadline for Greece to reach a deal since any extension or change to the bailout agreement that expires on Feb. 28 would have to be approved by several national parliaments.

However, EU deadlines often slip and Merkel has in the past agreed financial rescues only at the very last moment when she could tell Germans the future of the euro zone was at risk.

Berlin is Greece's biggest creditor, owed 50 billion euros as its share of the EU/IMF bailouts. As Europe's biggest economy, it would take a hit in the turmoil that might ensue if Greece defaulted and left the euro area.

However, whether for tactical reasons or out of deep exasperation with Athens, Berlin has conveyed the message that a Greek exit, while not desirable, would be manageable. German Finance Minister Wolfgang Schaeuble, who has taken the hardest line, has pointed to calm on world markets this week.

European shares inched up on Friday, trading close to Thursday's seven-year high, but borrowing costs for peripheral euro zone governments also rose in a sign of uncertainty about the outcome with Greece.

(Writing by Paul Taylor; Editing by Giles Elgood)