By Jan Strupczewski
IQALUIT, Canada, Feb 5 (Reuters) - Deepening woes about euro zone debt may add urgency on Friday to a meeting of G7 finance leaders in the Canadian Arctic, where focus so far had seemed to be more on ministerial dog sledding and caribou dinners.
European policymakers scrambled to reassure markets about the stability of their 16-nation currency bloc as investors shed euro assets for a second day on fears about debt-laden member states like Greece and Portugal.
The sell-off comes as finance ministers and central bank governors of the euro zone's top three economies -- Germany, France and Italy -- fly to meet their counterparts from the United States, Canada, Japan and Britain for the Group of Seven's most remote and inaccessible meeting to date.
"The French have said they want to raise Europe (at the meeting)," one G7 official said on Friday.
Iqaluit, where they will gather, is the capital of Canada's Arctic territory of Nunavut, a flight of some three hours from either Ottawa or Montreal. It features blocky aluminum clad buildings set up on stilts because you can't dig foundations into the permafrost.
Financial leaders of the G7 are to discuss financial sector reforms after U.S. President Barack Obama proposed to limit the size of banks, restrict proprietary trading, and sever their ties to hedge funds and private equity as well as imposing fees on big institutions to recoup the billions spent rescuing the sector.
Even as Europe falters, the delegates will look at how the global economy is recovering from the financial crisis. Data on Friday showed the U.S. labor market improving slowly as the unemployment rate surprisingly dropped to a five-month low although payrolls fell. For story see [ID:nN04115255]
"From a European standpoint, allowing this situation (with Greece) to run on and letting markets keep speculating on what happens next is a major issue," said Mike Moran, currency strategist at Standard Chartered in New York.
"We don't believe Greece will be allowed to fail or leave the euro zone, but it's one of those slow burning issues. As we saw with subprime, that can quickly get out of hand."
Host nation Canada, which raised many international eyebrows with its decision to hold the meeting in communications-light Iqaluit, has warned markets not to expect major decisions.
"This meeting will not revolve around negotiated communiques and scripted text. It will be a time for frank discussion and a collective determination to help put the global economy firmly on the road to recovery," said Canadian Finance Minister Jim Flaherty said in a statement on Friday.
The declining role of the G7 itself and its future as a discussion forum compared to the G20 group of industrialised and developing nations, which includes major emerging markets like China and Brazil, will also be part of the agenda.
Some say there are still topics that won't work in the wider setting of the G20. But there are also questions whether the G7, which cut its teeth on efforts to steer currency markets during the eras of Plaza and Louvre accords in 1985 and 1987, remains the right forum for foreign exchange discussions in an increasingly globalized world.
"It's more fair to debate the yuan at the G20 instead of G7 meetings," Japanese Finance Minister Naoto Kan told reporters before leaving for Iqaluit.
France wants the G7 to discuss the yuan, French Economy Minister Christine Lagarde said. A euro zone document prepared for the G7 meeting said China's yuan policy could lead to a new build-up of global trade and savings imbalances.
France said last month it would seek specific measures that could be put in place in 2011 to tackle the world's currency imbalances, after French President Nicolas Sarkozy said that monetary disorder in the world had become unacceptable.
The G7 have long warned in statements issued at the end of meetings that excessive exchange rate volatility was a threat to growth and have also long called for an appreciation of the yuan to help ease global imbalances.
Some of G7 officials will start their meeting with a spell of dog sledding in bright, sunny weather at temperatures of around -15 degrees Celsius (0 Fahrenheit). A strong wind bites through down jackets, and makes the weather feel far colder.
The dogsleds will be driven by the son and daughter of Matty McNair, a female world champion dogsled master who set world records in journeys to the South and North Poles.
A working dinner will offer local specialties -- Arctic Char and Roast Caribou Medallions.
The Mayor of Iqaluit, Elisapee Sheutiapik, is set to speak about the town's project to fight domestic violence, which Iqaluit has the highest level of all cities in Canada.
A local rock star, Lucie Idlout will perform a song for the officials on the subject, which has only recently ceased to be taboo in the area.