* Germany, France look to forge EU consensus on crisis
* Tighter budget rules, stronger rescue fund on agenda
* No firm decisions expected; aim is for late-March deal
By Luke Baker
BRUSSELS, Feb 4 (Reuters) - France and Germany will lay out proposals for tighter economic coordination at a summit on Friday, hoping to forge agreement among European leaders on how best to resolve the euro zone's year-long debt crisis.
No concrete decisions are expected at the one-day meeting, with diplomats describing it as a stock-taking exercise to assess progress since the 27 leaders last met in mid-December, since when concerns about the crisis spreading from Greece and Ireland to Portugal, Spain or beyond have diminished.
Diplomats say the summit's aim is to build consensus among the 17 euro zone countries, and the wider European Union, on a "comprehensive package" to resolve the crisis, including closer euro zone fiscal coordination and a reinforced rescue fund. Germany and France want an agreement by the end of March.
"We are at a key moment -- markets are turning, doubts about the solidity of the euro and the euro zone are dissipating," a source in the French presidency said on Thursday, briefing reporters ahead of the summit.
"This is the moment to take a great step forward."
After a year of trying to extinguish the sovereign debt flames, officials have been heartened by relative calm in financial markets in recent weeks, but recognise that failure to agree on concrete measures before the next scheduled summit on March 24-25 could reignite the conflagration.
In a sign of the increased confidence markets are showing in how the euro zone is confronting the crisis, Spain saw borrowing costs fall sharply at an auction of two- and five-year bonds on Thursday. Portugal has also had encouraging recent auctions.
In their proposals, France and Germany are expected present plans for stricter fiscal discipline, including the idea of a "debt brake" that would establish a constitutional limit on deficits for euro zone members, and calls for more regular euro zone summits to better coordinate economic management.
Germany's ideas also include raising the pensionable age depending on a country's demographics, limiting wage increases, and agreeing a common tax base for corporations.
BIG, BOLDER RESCUE FUND
Friday's discussions will also cover the European Financial Stability Facility (EFSF), the 440 billion euro fund set up last May and used in November to bail out Ireland, with policymakers focused on finding ways to increase its effective size and make it more flexible.
Because of guarantees built into the EFSF to maintain its triple-A credit rating, the fund can only lend about 250 billion euros, not 440 billion, meaning if Portugal and Spain ultimately needed bailouts, there might not be sufficient funds.
One proposal for increasing the capacity involves the six euro zone member states with triple-A credit ratings increasing their own guarantees, while the reminder would have to make cash deposits to bolster the fund.
The EFSF is the chief weapon in the EU's debt-fighting arsenal, but disagreement remains over how it should be strengthened and Germany appears determined to secure stricter budgetary commitments from other euro zone member states in exchange for agreeing amendments to the EFSF.
Among ideas on the table for improving the fund is to allow it to buy the bonds of distressed euro zone states, either directly in the primary market, or by lending money to states to buy back bonds, euro zone officials have said.
But a German government official, briefing in Berlin ahead of the summit on Wednesday, appeared to close the door on such a possibility, saying bond-buying wasn't a viable option.
"It is not in our interest that the EFSF can buy bonds," the official said, speaking on condition of anonymity. "This is not practical."
There remains the risk that Friday's summit will underline just how far apart states remain, with Germany largely backed by the likes of France, Finland and the Netherlands, while Greece, Italy, Spain and others pull in different directions.
Euro zone officials privately express concerns about how slowly work is progressing and say they doubt whether a complete package can be agreed by late March. Laders will consider holding an extra summit in early March to maintain momentum.
Friday's summit was originally set up to discuss energy issues. While they remain on the agenda, the debt crisis and the situation in Egypt are likely to dominate the discussion. A statement from the leaders on Egypt is expected.
(With additional reporting by Catherine Bremer and Andreas Rinke)