* Merkel, Sarkozy back Brussels for ratings sector review
* Merkel, Sarkozy say more competition in ratings needed
* S&P says has duty to tell investors how it sees things
* Ratings users says policymakers taking aim at wrong target
(Adds ratings user reaction)
By James Mackenzie and Huw Jones
PARIS/LONDON, May 6 (Reuters) - French President Nicolas Sarkozy and German Chancellor Angela Merkel took aim at major ratings agencies on Thursday, saying the European Union should look carefully at whether they had worsened the Greek debt crisis.
"The decision by a ratings agency to downgrade the rating of Greece even before the programme of the authorities and the amount of the support plan were known prompts us to consider the role of the ratings agencies in the spreading of crises," the leaders wrote in a joint letter to European Council president Herman Van Rompuy.
The remarks are the latest in a series of criticisms aimed at the big ratings agencies -- Moody's, Standard and Poor's and Fitch -- for their role in the financial crisis.
Merkel and Sarkozy said a review of the sector should be launched and proposals should be considered to "reinforce competition in the market for rating credit."
They also said the European Commission should conduct a "critical review of the sense of using agency ratings in European regulations."
In particular, the role of ratings in determining how much capital a bank must set aside to cover risks, should also be reduced, the letter said.
WITHOUT FEAR OR FAVOUR
Standard & Poor's, the ratings agency singled out for downgrading Greek debt as the rescue package was being put together, rejected the criticism, saying its duty was to tell investors how it sees things, without fear or favour.
"S&P's rating of Greece in recent months has been consistently more positive than that of the market - and that remains the case today, even after our recent downgrade," a spokesman for S&P said.
"We have repeatedly pointed out that a bailout, while addressing Greece's near-term liquidity problems, does not necessarily resolve its longer term solvency issues," the spokesman said.
Moody's and Fitch had no immediate comment.
There have been repeated calls from European policymakers in recent years for a home-grown agency to compete in the U.S. dominated sector but with little progress. Users of ratings, such as investment banks, said policymakers are aiming at the wrong target.
"They should be focusing on getting stability back to the market and a European ratings agency is not going to do that," said Mark Austen, acting chief executive of the Association for Financial Markets in Europe.
AFME members include banks and primary market bond dealers who use ratings.
"We are unclear how a publicly controlled ratings agency would be independent to rate what is effectively its own debt so that the market has confidence in it," Austen said.
DARK MOOD
Jose-Manuel Barroso, president of the EU's executive European Commission, criticised on Wednesday what he called the deficient work of rating agencies, saying they let the dark mood in financial markets cloud their judgement.
The EU's financial services commissioner, Michel Barnier, signalled on Monday that further rules may be needed but some financial industry officials believe policymakers are trying to cow the sector to stop more major downgrades of sovereign debt, especially in Portugal and Spain.
Ratings agencies were slammed in the financial crisis for giving high ratings to subprime mortgage-based products that turned toxic and untradeable, and for being too slow in warning investors.
This led to new EU rules being phased in from September requiring ratings agencies to register and undergo direct supervision if they want to issue ratings in the 27-nation bloc.
Eddy Wymeersch, chairman of the Committee of European Securities Regulators (CESR), said last week a state-backed agency could leave the EU open to huge liabilities.
CESR member Jean-Pierre Jouyet, head of France's AMF stock market regulator, said this week a public European agency would not be credible outside Europe and preferred an international one, perhaps guided by the International Monetary Fund. (Writing by James Mackenzie, Editing by Sudip Kar-Gupta, Ian Jones)