Lagarde urges Berlin to boost domestic demand

Greece is battling a debt crisis, and there is concern that its problems could undermine confidence in the euro and spread to other indebted euro zone countries like Portugal and Spain.

Germany and France, the euro zone's biggest economies, have been the driving force behind the single currency and Lagarde's remarks revealed the gap that has opened between them over how best to tackle the Greek crisis and other strains in the zone.

Euro zone finance ministers meet later on Monday, hoping to agree on a way of providing Greece with financial aid, should it request it, without breaking EU rules. A senior EU source has told Reuters bilateral loans and loan guarantees are among measures being considered.

Lagarde said Berlin should encourage domestic demand to boost its partners' ailing export industries.

" those with surpluses do a little something? It takes two to tango," Lagarde said in the interview with the Financial Times.

"Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs," Lagarde said.

"When you look at unit labour costs in Germany, they have done a tremendous job in that respect. I'm not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence."

Last month French President Nicolas Sarkozy and German Chancellor Angela Merkel pledged to reinforce their alliance and strengthen economic governance in the wake of the financial crisis.

TRADE IMBALANCES RARELY DISCUSSED