* ECB's Stark says world must coordinate better on FX -paper
* ECB's Gonzalez-Paramo: FX instability bad in itself
* Stark says yuan likely to appreciate in value
* Says Greece making good progress, reaffirms exit plans
(Adds comments from Stark speech)
FRANKFURT, Oct 15 (Reuters) - Countries must avoid a "fatal" race to devalue and instead coordinate better to smooth out currency swings, European Central Bank Executive Board member Juergen Stark was reported on Friday as saying.
Fellow ECB policymaker Jose Manuel Gonzalez-Paramo said instability in foreign exchange markets was bad in itself but denied major economies were embroiled in a currency war.
Currency tensions have escalated in recent weeks in the run-up to meetings of the Group of 20 leading nations in South Korea, with countries at odds over what exchange rates are appropriate for fostering balanced growth. [ID:nTOE69E02T]
Both Gonzalez-Paramo and Stark said China, which is resisting pressure from the United States and other developed nations to allow its yuan to revalue faster, needed to introduce more flexibility, and Stark was confident this would occur.
"There are good reasons to assume that in future there will be a further appreciation of the Chinese currency," Stark said in an interview with German daily Handelsblatt.
It would be "fatal" if countries embarked on a race to devalue, "which in the end will bring about protectionism .. Protectionism in the 1930s is what led to the global economic crisis," Stark added.
Speaking in an interview on Spanish state television, Gonzalez-Paramo said he considered the notion of a currency war "an unfortunate one because there isn't one.
"... There is a permanent dialogue among the authorities in the main countries in the world, both emerging and developed."
A German government spokesman said foreign exchange rates would be on the agenda at a summit between Germany, France and Russia next week. [ID:nBAT005708]
Stark appealed for global governments to adopt euro zone-style coordination of deficit levels.
While economic policy should still be managed by individual countries, "we should agree globally on principles for budget policy in the medium term, like we do in Europe," he told the paper.
DANGERS SEEN
Stark said a reduction in currency volatility and sustainable economic growth could not be achieved without better coordination between fiscal, monetary and economic policy.
He told a congress in Stuttgart on Friday that the Greek sovereign debt crisis showed a clear need for a "quantum leap" in EU oversight, even if investor appetite for the country's bonds has improved of late.
"From today's point of view, Greece is making good progress. Now what is needed is a deep breath," he said, in an appeal for markets to be patient. [ID:nFLAFLE6CL]
While euro zone governments cannot join the devaluation race, precarious levels of state debt in parts of the single currency area and dependence on foreign investors to fund ballooning budget deficits led to a sharp depreciation in the value of the euro.
Stark said the ECB would maintain its EU sovereign bond purchasing programme for as long as needed and withdraw its unconventional monetary policy measures when appropriate -- a departure from fellow hawk and ECB heavyweight Axel Weber, who said this week the central bank's bond buying programme should be scrapped.
"The programme is temporary in nature," Stark said.
Stark called interest rates appropriate for the medium term since the ECB saw no risks for either inflation or deflation on the horizon.
But holding rates at a very low level for too long presented dangers to a functioning money market and risked delaying the necessary deleveraging of public and private sector debt.
"The ECB will stick to its policy of gradually and cautiously withdrawing its unconventional measures as appropriate. In no way will the remaining measures be retained longer than is necessary to guarantee stable prices in the euro zone," Stark said.
Bank of France chief Christian Noyer said low rates had helped restart the economy after the financial crisis but they could not stay at the current level forever. [ID:nWEA2515]
(Reporting by Edward Taylor and Marc Jones, additional reporting by Elisabeth O'Leary and Nigel Davies in Madrid and Christiaan Hetzner in Frankfurt, editing by Mike Peacock, John Stonestreet)