* U.S. wants G20 to agree to let markets drive currencies
* South Korea meetings take place during currency tensions
* Don't impede trade adjustments, U.S. urges (Adds quotes, details)
By Glenn Somerville and Doug Palmer
WASHINGTON, Oct 20 (Reuters) - The United States wants the Group of 20 countries to reduce global economic imbalances by committing to curb trade surpluses or deficits and by letting currencies rise more freely, a senior U.S. official said on Wednesday.
Ahead of weekend meetings of G20 finance ministers in Gyeongju, South Korea, the Treasury Department official made clear Washington wants currency values to be a focal point and sees current account levels as a vital part of the discussion.
China wasn't mentioned by name but Beijing's practice of managing the value of its yuan has angered the United States, which argues the currency's low value is fostering global currency tensions.
"When large economies with undervalued exchange rates act to keep their currencies from appreciating, that compels other countries to do the same, setting off a dynamic of competitive nonappreciation," the official said at a news briefing.
China in turn has argued U.S. policies are the root of strained currency relationships.
Expectations of a further loosening in U.S. monetary policy have driven the dollar down to 10-month lows against a broad basket of currencies, fueling currency problems elsewhere.
Investors seeking higher yields have sent sudden flows of capital into dynamic emerging markets like Brazil, driving their currencies up and threatening to slow exports.
HEIGHTENED G20 ROLE SOUGHT
The United States sees the G20, an organization of both advanced and key emerging-market countries, as critical in the search for ways to limit currency instability and let market forces have more sway in setting foreign exchange rates.
"Something that we think will be front and central in our conversations this weekend and going forward is how the G20 can play an effective role in helping to undergird cooperation on these exchange rate issues and these external sustainability issues which are inherently matters for multilateral cooperation," the U.S. official said. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Interactive G20 graphic: http://link.reuters.com/men39p
U.S. Treasury Secretary Timothy Geithner departs on Wednesday for the gathering of G20 ministers and central bank governors where currency tensions will get a thorough airing.
Underlining the seriousness of the divisions, Bank of England Governor Mervyn King said on Tuesday that if policymakers can't agree on how to manage foreign exchange issues and economic imbalances, they risk sparking a destructive world-wide trade war.
The U.S. official said the United States was willing to do its part by saving more and by strengthening exports to reduce its trade gap, but other countries that enjoy trade surpluses had to cooperate in correcting imbalances by allowing their currencies to rise in value.
FINDING AN OPENING
Asked if China might be more willing to discuss a target for its current account -- a broad measures of trade -- rather than exchange rates, the U.S. official first suggested asking China but then stated the U.S. position.
"From our perspective we believe these issues are fundamentally, inherently linked," the official said.
The idea would be to agree to a pre-set limit on the size a country's current account surplus or deficit should reach, expressing it in terms of a percentage of national output.
The problem would be that some countries that have very high deficits or surpluses might be unwilling or unable to quickly reduce them to an agreed level.
The U.S. official's comments implied that Geithner will try to rally support within the G20 for more unity around the necessity for letting currencies appreciate, though it remains unclear whether any specific agreement can be reached.
"In terms of what we think would be appropriate and would be important at this juncture within the G20 is to emerge with a clear commitment to cooperate to facilitate and not impede orderly current account adjustments," the official said.
Currencies are central to the meetings on Friday and Saturday, but finance chiefs also will discuss ongoing efforts to shift voting power at key lending institutions like the International Monetary Fund to emerging-market nations to reflect their economic might.
The U.S. official said a deal on IMF voting shares was "within reach," likely along the lines agreed at a previous G20 meeting in Pittsburgh for a 5 percent shift from overrepresented countries to underrepresented countries. (Additional reporting by David Lawder; Writing by Glenn Somerville)