* Small companies generate 2 in every 3 private-sector jobs
* Crisis has deprived companies of financing, affecting growth
By Robin Emmott
BRUSSELS, Sept 4 (Reuters) - European Union governments are considering a pan-European market where smaller companies can raise capital, in an effort to revive the stagnating euro zone economy, according to a document prepared for a meeting of finance ministers next week in Italy.
The euro zone's faltering economic recovery will be at the forefront of discussions at the two-day meeting in Milan from Sept. 12. With interest rates already at record lows, ministers are seeking more radical measures to help growth.
One option is a capital-market union, building on the euro zone's banking union. The aim is to reduce companies' reliance on banks by establishing the kind of funding offered by U.S. corporate bond markets.
"A line of action could aim at developing a common European framework for corporate bonds for issues of smaller amounts by unlisted firms," said the document, which was obtained by Reuters.
"Giving visibility to these practices across national markets would create a wider and more liquid market," the document said, outlining a potential new asset class for institutional investors such as pension and mutual funds.
The document also considers "the development of a European market for private placements" - the sale of securities to a small number of chosen institutional investors.
"Other forms of intermediation such as debt funds could also be developed," the document said, referring to funds that invest part of their assets in loans and bonds of unlisted companies.
In the aftermath of the euro zone debt crisis, small- and medium-sized companies are competing for scarce funding. Banks are reducing riskier lending to build up capital buffers, a problem in a continent where banks account for 80 percent of corporate loans.
In the United States, the proportion is the reverse - up to 70 percent of funding for the economy comes from markets, the rest from banks.
Smaller companies, often with less than 10 employees, provide two out of every three private-sector jobs in the European Union, according to the European Commission. Helping them to grow is crucial to lowering record joblessness.
Another hangover of the crisis is the differing cost of financing across the euro zone, or "fragmentation", in a bloc that aimed to create the same financing conditions for all.
An obstacle for smaller companies on capital markets is the administrative costs of providing continual information to investors and the legal costs of going to market.
In Milan, ministers will consider setting up an EU support service for companies providing such services to companies, although it was not immediately clear how this would work in practice, or who would pay for it.
One idea is a pan-European system of information providers that can specialise in collecting, classifying and analysing data on small- and medium-sized companies for investors.
The European Central Bank is at the heart of wider efforts to create a capital markets union by trying to revive securitisation, or the bundling of loans into bonds to raise cash for companies to invest.
An integrated European capital market, or capital markets union, is still a long way off, however.
It depends on the EU moving beyond public subsidies and loans to coordinate financing for companies and infrastructure through project bonds, public-private partnerships and infrastructure funds. (Reporting by Robin Emmott; Editing by Larry King)