Germany eyes new bank rescue plan next week-sources

BERLIN Feb 12 (Reuters) - The German government aims to agree on a draft bill to extend its bank rescue package next week, sources in the ruling coalition said on Thursday.

By Wednesday, the cabinet aims to set out measures that will clarify whether the government can take control of struggling banks, the sources told Reuters.

This will depend on whether a deal can be reached with U.S. investor J.C. Flowers on stricken lender Hypo Real Estate HRXG.DE, which has received billions of euros in state guarantees.

Flowers is Hypo's biggest shareholder, and is holding talks with the government on Thursday about the matter.

The Finance Ministry, controlled by the Social Democrats (SPD), favours taking complete control of Hypo, sources said.

However, Chancellor Angela Merkel's conservatives, who rule in coalition with the SPD, say outright nationalisation of banks should only be carried out as a last resort.

Hypo will publish its 2008 results at end-March, and analysts have said losses at the bank are likely to be so high that it could require fresh capital. The government hopes to pass a bill before the figures are published, the sources said.

The cabinet will also lay the foundations for the introduction of individual "bad banks" to clear lenders of toxic assets. The government has ruled out a central bad bank.

"The draft won't contain a polished model for bad banks," said a person familiar with the plans. "For one thing, the EU parameters for this are not clear."

The Finance Ministry has said it still needs time to work out how best to set prices for banks' toxic assets.

The government is also expected to agree to extend a third of the loan guarantees made by bank rescue fund SoFFin to five years from three years at present, the sources said.

Finance experts from the ruling coalition and officials from the finance and economy ministries are due to discuss the bill on Friday, according to sources in the ruling coalition. (Writing by Dave Graham; Editing by Andrew Macdonald)