* Policy will cut crop-based target, encourage new biofuel sources
* Draft proposals need member state approval
* U.S. biofuel policy also criticised (Adds Oxfam reaction)
BRUSSELS/NICOSIA, Sept 17 (Reuters) - The European Commission announced a major shift in biofuel policy on Monday, saying it plans to limit crop-based biofuels to 5 percent of transport fuel, after campaigners said existing rules take food out of people's mouths.
Record high global grain prices have intensified calls for changes in EU and U.S. biofuel policies, criticised for snatching away land that should be used for food.
EU Climate Commissioner Connie Hedegaard and Energy Commissioner Guenther Oettinger confirmed in a joint statement on Monday they wanted to cap the use of crop-based fuel.
"It is wrong to believe that we are pushing food-based biofuels," the commissioners said.
"In our upcoming proposal for new legislation, we do exactly the contrary: we limit them to the current consumption level, that is 5 percent up to 2020."
Reuters reported last week the European Commission would seek to impose a limit on the use of crop-based biofuels of 5 percent as part of a target to raise the share of renewable fuel in the transport mix to 10 percent by 2020.
The draft proposals, which are expected to be published in October, will need the approval of EU governments and lawmakers to become law.
"The Commission's message for post-2020 is that our clear preference is biofuels produced from non-food feedstocks, like waste or agricultural residues such as straw," Monday's statement from the commissioners said.
"These new types of biofuels are not in competition with food, nor do they require additional land. We are pushing biofuels that help us cutting substantial CO2-emissions, do not compete with food and are sustainable and green at the same time."
With the 10 percent target looking very difficult, energy ministers meeting informally on Monday in Cyprus, holder of the EU presidency, debated how biofuels could be developed sustainably.
Speaking on the sidelines of the meeting, Oettinger said increasing the use of biofuels depended on developing a new generation of sources. These second-generation biofuels are much more costly than those made from crops such as rapeseed and wheat.
"I think we agree that a higher figure for that mixture of biofuel beyond 5 percent can only be achieved from a second generation source, not from crops but agricultural waste and leftovers instead of from food crops," he told reporters.
Campaign group Oxfam urged ministers to support the proposed EU limit and to ignore warnings from biofuel producers that the plans would hurt Europe's economy and result in job losses.
"European governments and the European Commission must not cave in to pressure from the biofuels industry," said Natalia Alonso, head of Oxfam's EU office. "We cannot continue to burn food in our petrol tanks while poor families go hungry."
The EU's biofuel goal to source 10 percent of road transport from renewable sources by the end of the decade is part of an overall aim to increase use of renewable sources and limit carbon emissions.
It also has a goal to draw 20 percent of the total energy mix from green energy.
Oettinger said the bloc was on track for the 20 percent goal by 2020, but subsidies were an issue and he urged a more harmonised EU approach.
"A major disadvantage has been that in some member states, often budgetary consolidation has led to abrupt changes," he said. "This is the opposite of protecting people's confidence so they can safely plan, and it frightens off investors."
Too much subsidy was as bad as sudden changes, and subsidies will have to dwindle as technology becomes more competitive, he said.
"What we have seen is that there has been too much support actually in some cases, more has been done to encourage than necessary, leading to free-rider effects," Oettinger said. (Editing by Rex Merrifield and Hugh Lawson)