* EFSF's Regling says no doubt euro will survive crisis
* Euro zone needs rescue mechanism that avoids moral hazard
* Budget sinners must face more rigorous sanctions earlier
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BERLIN, Sept 23 (Reuters) - Europe needs to set up a permanent rescue mechanism for countries in fiscal trouble, said the head of the European Financial Stability Facility (EFSF), which winds down in 2013.
EFSF Chief Executive Klaus Regling told a conference in Berlin on Thursday that a crisis mechanism, albeit with tough conditions, was needed with "some private sector involvement to avoid moral hazard".
"The EU budget is very small for good reasons, and the markets have been questioning what would happen, given that there is no central fiscal authority," Regling said, adding that this was not the case in other large economic entities such as the United States or China.
"Therefore I think it is extremely important that there is a fallback mechanism," he said.
Euro zone countries set up the EFSF in May as a safety net for members of the single currency area to prevent the sovereign debt crisis, triggered by Greece, from spreading.
But the borrowing vehicle, which is backed by 440 billion euros ($575 billion) of euro zone government guarantees, is due to run out in 2013.
Regling said that he had no doubts that the euro would survive and come out of the crisis stronger than before, but that stronger economic surveillance and better implementation of the European Stability and Growth pact were needed to ensure this.
"It has to sink in that the main rule of the stability pact is not the 3 percent deficit ceiling... but it is to have a balanced budget," said Regling.
"Sanctions should be applied earlier and more rigorously to ensure the full implementation."
Stronger pressure from the European Union on member states to uphold budget rules as well as from financial markets, which have pushed up intra-European bond spreads over the past year, would ensure better results, Regling said. (Reporting by Sarah Marsh and Noah Barkin; Editing by Hugh Lawson)