* German cabinet to approve European package on Tuesday
* Merkel wants guarantees linked to budget consolidation
* Euro fund hits Merkel after major election reverse
* German guarantees could reach 123 bln euros
(Adds sum of German contribution)
By Dave Graham and Sarah Marsh
BERLIN, May 10 (Reuters) - Chancellor Angela Merkel said on Monday her cabinet aimed to expedite Germany's part of a $1 trillion emergency rescue package to stabilise the euro despite suffering a serious state election defeat on Sunday.
Merkel said the cabinet would meet on Tuesday to approve Germany's contribution to the package thrashed out by European Union finance ministers and the IMF at the weekend to prevent a sovereign debt crisis spreading through the euro zone.
Speaking just hours after her alliance of conservatives and pro-business Free Democrats (FDP) lost a state election in North Rhine-Westphalia (NRW), Germany's most populous state, Merkel said the rescue plan was needed to defend the euro.
"The member states of the European Union showed yesterday that we have the common political will to do everything for the stability of our common currency," she said in Berlin.
The package -- 440 billion euros in guarantees from euro states plus 60 billion euros in a European instrument -- could include 123 billion in loan guarantees from Germany, according to its share in the European Central Bank's capital holdings.
But that sum could rise by up to 20 percent since member states in trouble would not be expected to contribute to the plan, Gregor Gysi, parliamentary group leader of the opposition Left Party, said on Monday after speaking with Merkel.
The package may prove another potential headache for Merkel, who already has a mounting list of problems in Berlin.
The chancellor has come under fire across the political spectrum for taking too long to approve aid to bail out Greece, a rescue which was unpopular in Germany and resonated strongly in the final phase of the NRW election campaign.
The Greek aid eventually got fast-track approval from parliament despite concerns it could be derailed by internal wrangling over the details and by a lawsuit by German academics.
Merkel said she did not want to waste time in approving the European package but that there was time to discuss it properly.
"We don't need to pass the law in two or three days. We can conclude the consultations with a bit more time, quickly but thoroughly, because 60 billion euros ... are already available without any legal measures necessary," she said.
Merkel's spokesman Ulrich Wilhelm said that although not all member states would be able to participate in planned bilateral aid, the EU was not becoming "a transfer union".
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One of the academics who fought the Greek aid, eurosceptic economist Joachim Starbatty, said he might file a similar lawsuit against the European rescue plan.
EU finance ministers said the International Monetary Fund was expected to contribute 250 billion euros, raising the total to 750 billion euros, about $1 trillion.
The Sueddeutsche Zeitung daily said Merkel had been upstaged by French President Nicolas Sarkozy in the EU talks, reinforcing the impression she had dithered, and making it harder for the chancellor to sell the rescue plan to a sceptical public.
"Now she will have to live with the verdict that a rescue package a la Francaise could have been put together weeks ago, but that she unnecessarily pushed up the cost of it," it said.
Merkel's loss in NRW is a blow to her little more than six months into her second term in office, meaning she will have to rely on opposition parties to pass her policy agenda, which had included billions of euros in planned income tax cuts.
However, following criticism that the cuts could not be justified due to Germany's stretched finances, Merkel said on Monday it may have been a mistake to press hard for them and that she now saw no scope for them before 2013 at the earliest.
The outcome of the NRW vote made it uncertain who would form the next government in the state, though it was clear that the Christian Democrat-FDP coalition Merkel leads in Berlin would not be able to continue the partnership at the local level.
Speculation grew she may also have to reshuffle her cabinet if the health of her finance minister, Wolfgang Schaeuble, does not improve, though the government denied this.
Merkel urged European policymakers to attack the euro's problems at the root by cutting back their budget deficits.
"We have to fight the causes of the difficulties, so budget consolidation in all member states is increasingly important," the chancellor said. "The access to the guarantees ... will be linked to countries presenting budget consolidation programmes to the IMF and the EU, which will then be regularly inspected."
German Vice Chancellor Guido Westerwelle, who as FDP leader was blamed by many for his party's poor showing in NRW, said financial markets had to be regulated to prevent speculation.
"Above all, it is important that those who are attacking the euro as a currency know since yesterday that we are willing and ready and capable of fending off these attacks," he said. (Additional reporting by Brian Rohan, editing by Stephen Brown and Mark Heinrich)