* Finance minister under threat in likely reshuffle
* Close ally Balls seen as possible successor
By Sumeet Desai
LONDON, June 1 (Reuters) - With his Labour Party facing a rout in Thursday's local and European elections, Prime Minister Gordon Brown looks sure to reshuffle his cabinet and finance minister Alistair Darling could be the most high-profile victim.
Some aides say they have been urging Brown to put schools minister and close ally Ed Balls into the Treasury for a while, arguing it would bring more discipline to the ministry and give Labour a better chance of winning a national election due by next year.
A source close to Brown told Reuters that plans have reached a stage where which officials would move departments have been discussed though no decisions have been taken and probably won't be until after the local and European elections on June 4.
"He (Brown) would be mad not to put Ed in now," the source said. Labour is well behind in the polls and set to lose power to the opposition Conservatives next year after ruling since 1997. [ID:nL1614423]
Such a move also risks making economic policy more left-leaning if Balls is keen to burnish his credentials as a future Labour leader with the party's traditional support base but his room for manoeuvre may be limited given the dire state of the public finances.
Other advisers, however, say they are concerned that sacking a finance minister sends the wrong signal to markets at a critical time and would look like Darling was being set up as a fall guy after having to deal with the banking crisis and the recession.
The British economy is set to shrink at its fastest pace since World War Two this year and public borrowing has hit a record high as the government has had to shell out billions of pounds to bail out the banking sector.
Analysts say Darling has done the best he could under the circumstances. But his position has been somewhat undermined by the ongoing expenses scandal that has engulfed British politics for a month.
On Monday, he denied a report in the Daily Telegraph newspaper that he had claimed for a service charge on a London flat he let to tenants while also claiming living expenses for another home provided free by the government.
Brown rallied behind him. "Alistair Darling is a very good chancellor and he's been a very good colleague and friend," he said on BBC Radio. "I don't think there is substance in these allegations."
POLICY SHIFT?
Markets would likely take Balls being moved to the Treasury in their stride.
A former journalist with the Financial Times, he is well known to them as a former Treasury minister and as Brown's right-hand man when he was finance minister for a decade. His wife Yvette Cooper is a current Treasury minister.
Balls was one of the architects behind the decision in 1997 to grant the Bank of England independence to set interest rates and helped devise the five tests on membership of the euro single currency.
He also has close ties with White House senior economic adviser Larry Summers, whom he studied under at Harvard, and U.S. Treasury Secretary Timothy Geithner, which would stand him in good stead with London currently holding the G20 presidency.
But Treasury officials told Reuters they are concerned that Balls as finance minister would lead to a flurry of initiatives designed to garner media headlines. Many have been impressed by Darling's calm and steady approach.
Darling, 55, is also less likely to take risks than Balls, 42, part of a younger generation of ministers who will probably fight to replace Brown at some stage.
"I'm not going to say that I don't want to be leader of the Labour Party, that would be a silly thing to say," Balls said in an interview in March.
"Would I like to be chancellor at some point in the future? Of course I would. I'd love it," he told the New Statesman magazine then.