* FDP opposed to extending euro rescue mechanism
* Haircut plan also has support from Merkel's CDU
By Dave Graham
BERLIN, Sept 10 (Reuters) - Germany's Free Democrats (FDP), who rule with Chancellor Angela Merkel's conservatives, have backed a draft plan to impose tougher sanctions on euro zone budget sinners in future, including haircuts on sovereign debt.
The parliamentary group of the pro-business FDP on Friday backed a set of proposals aimed at safeguarding the future of the European single currency once a 750 billion euro rescue mechanism for it expires in mid-2013.
By then "any kind of automatic support mechanism for one over-indebted state by an EU partner must be ruled out," said a draft of the proposals seen by Reuters.
Germany, which has shouldered the biggest share of risks in a bailout of Greece and the package assembled to protect the euro currency, has been pushing for the creation of a mechanism to allow the "orderly insolvency" of member states.
Merkel's centre-right coalition is eager to avoid German taxpayers being on the hook again for other states' debts.
The FDP said a key component of tougher measures to prevent a repeat of the euro zone debt crisis was developing a means to impose "haircuts", or discounts, on holders of euro zone sovereign debt if the issuing states become insolvent. "The German government must push for this emphatically in discussions currently under way," the FDP said.
Last month, the budgetary spokesman of Merkel's Christian Democrats (CDU) also said the haircut option was imperative.
If a majority of member states reject this and urged the rescue fund to be extended, then rather than see Berlin pushed into a fiscal "transfer union", Germany should reserve the right to withhold its support for insolvent countries, the FDP said.
Reforms designed to prevent a repeat of the sovereign debt crisis that shook the euro zone this year are being worked out by a task force led by EU President Herman Van Rompuy.
The FDP said the haircut option should apply to any sovereign bonds issued after the mechanism expires, though a debt restructuring agreement should be considered for any older debt that generated a "larger scale" crisis, it added.
To prevent future crises, the EU's statistics office Eurostat should be granted the right to access and oversee national data bases of member states, the party said.
Echoing the chancellor, the FDP said the EU's Stability and Growth Pact, in which deficit rules are enshrined, needed to be tightened up to enforce budget stability.
"If a country is already over-indebted, penalties and securities should no longer be paid in cash, but by depositing securities backed by state assets which can be sold," it said.
The FDP added that it expected the German government to push for an extension of the period in which candidates to join the euro zone are monitored, saying four years could be suitable. (Editing by Stephen Nisbet)