By Madeline Chambers and Emily Kaiser
BERLIN/PITTSBURGH (Reuters) - German Chancellor Angela Merkel warned on Thursday a U.S. drive to rebalance the global economy risked distracting the Group of 20 from a more urgent need for market regulation at their Pittsburgh summit.
Merkel's remarks in Berlin underscored differences between some of the world's largest economies as she, U.S. President Barack Obama and other G20 leaders headed for talks on Thursday and Friday on how to respond to the global financial crisis.
The G20 leaders, invited to Pittsburgh by Obama, will discuss ways of nurturing the fragile recovery from the worst recession since the 1930s and how to ward off future crises.
The United States, the world's largest economy, wants G20 countries to commit to reducing reliance on U.S. consumers by boosting consumption in exporting countries, such as China, while encouraging debt-laden nations such as the United States to save more.
"I have made clear we should not look for other topics and forget about financial market regulation," Merkel said. "Imbalances are an issue. We must have imbalances and all the possible causes on the agenda. Exchange rates belong to that."
Merkel, on track to win a second term in an election on Sunday, said the world's leading countries were making progress on financial reform and should not shy away from measures that might prove unpopular with the banking industry, where the economic crisis began.
European central bankers said on Thursday that banks must hold more capital to avert the need for government bailouts but steps to raise their capital buffers must be carefully timed.
MANY BRIDGES TO CROSS
G20 diplomats tried to narrow gaps on the U.S. rebalancing proposal and issues such as the pace of global trade talks, use of fossil fuels and the balance of power of global financial institutions before the start of the summit.
A draft communique was described as half-completed. It will say there are signs the global recession is ending but stress the need to continue with economic stimulus measures, an Italian official said.
The International Monetary Fund has been urging G20 leaders to keep stimulus plans in place while millions of people who lost their jobs during the crisis remain out of work.
Developed economies are pressing developing economies to increase domestic demand but it was still an open issue, the Italian official said.
The United States was described by European sources as resisting pressure to set an early 2010 deadline for a long-sought breakthrough in the Doha round of world trade talks.
The European Union, Brazil and Australia want G20 leaders to set an early 2010 deadline for reaching agreement on the basic formulas, or "modalities," to cut agricultural and manufacturing tariffs and to reduce domestic farm subsidies.
At the United Nations, British Prime Minister Gordon Brown said global leaders would institutionalize the G20 as the world's main economic governing council. He said G20 leaders would meet regularly, with South Korea taking over the presidency next year.
Brown and the White House insisted the U.S.-British relationship remained strong when he was asked about British media reports that Obama had refused British entreaties for a bilateral meeting with Brown on his U.S. visit.
Downtown Pittsburgh was under a security lockdown for the summit as leaders began streaming into the scenic city at the confluence of three rivers in western Pennsylvania.
The sheer volume of problems the two-day summit is set to address -- from the lopsided global growth model to climate change, tougher financial regulation and caps on bankers' pay -- prompted low expectations for any near-term action.
Europe is seeking to curb the excessive risk-taking that provoked turmoil on financial markets and shoved the world economy into recession. Several European leaders are also pushing for crackdowns on bankers' lavish pay packages.
Now that the recession in many countries appears to be ending, the challenge is to sustain the sense of urgency felt in April when the G20 agreed to work together to rescue the world economy and pledged hundreds of billions of dollars to finance crisis-fighting by the IMF.
U.S. GROWTH RETURNS
In the latest sign of incipient recovery, the U.S. Federal Reserve said on Wednesday that growth had returned to the world's biggest economy.
The number of U.S. workers filing new claims for jobless benefits fell last week, but a surprise drop in sales of existing homes in August suggested the economy's recovery from a severe recession would be slow.
The euro zone also appears poised to emerge from recession, although most economists expect only a gradual recovery. A key indicator of German business confidence fell short of expectations on Thursday.
China gave qualified support on Wednesday for the idea of improving global imbalances -- a daunting task.
China's private consumption accounts for little more than a third of its economy, while it exceeds 70 percent in the United States and Britain. By contrast, Chinese households saved about 40 percent of their disposable incomes last year, while the U.S. savings rate was just over 3 percent.
Several countries including China and Germany, the world's top exporter last year, have distanced themselves from the U.S. suggestion to make the IMF responsible for regular monitoring and policy recommendations to G20 members.
(Reporting by Reuters G20 team; Writing by Steve Holland, Tomasz Janowski and David Stamp; Editing by Howard Goller and John O'Callaghan)
