* G20 delegates clash over indicators of economic imbalances
* IMF says global imbalances growing, risk of overheating
* France's Lagarde says favours freer yuan exchange rate
(updates with details of preparatory meeting)
By Abhijit Neogy and Daniel Flynn
PARIS, Feb 17 (Reuters) - Officials of the G20 differed on Thursday over how to measure imbalances in the global economy on the eve of a meeting of finance ministers and central bankers of the world's leading economies.
French Economy Minister Christine Lagarde lowered expectations, saying G20 countries would have made major progress if they clinch a preliminary accord in Paris on what measures they will use to benchmark and address mismatches that could trigger a future financial crisis.
"This is something which is highly debated at the moment and will be in the next couple of days, because some countries do not want to be identifiable as doing such and such a policy," Lagarde told an Institute of International Finance conference.
"We will already have taken a big step forward if we get an agreement in principle ... on the elements that allow us to measure imbalances."
A source familiar with the discussion reported differences at a preparatory meeting of deputy finance ministers and top officials over whether to use indicators on the balance of payments, trade, real exchange rates and currency reserves.
China, under fire from the United States and other developed economies for keeping its exchange rate low, told the meeting that the International Monetary Fund's judgement on that the yuan is substantially undervalued was wrong, the source said.
In a report prepared for the ministers, the IMF warned that global economic imbalances have increased and were likely to grow further unless policies changed, and said there was a risk of emerging market economies overheating.
It also said the world economy faces growing risks from surging food prices and battered public finances in developed countries, and advocated a somewhat weaker dollar, according to the document obtained by Reuters.
Some G20 delegates said Lagarde's objective of reaching agreement in Paris on an initial short list of indicators seemed unrealistic.
France proposed including the current account deficit, real exchange rate and currency reserves in the initial list, the source at the preparatory meeting said.
China and Germany were dragging their feet because they did not want to be singled out in future for running excessive current account surpluses, delegates said.
"I don't think we can have benchmarks ready by April. I think a more realistic deadline could be the October ministerial meeting, but the Paris communique would perhaps mention this action plan," one G20 delegate from an emerging country said.
The United States and France consider it vital to have agreement on a set of indicators by mid-year so that guidelines can be agreed later in the year for coordinated global economic policies to reduce dangerous imbalances.
Other issues on the French G20 agenda include greater transparency and regulation of commodities prices and a reform of the international monetary system.
PRESSURE ON YUAN
Lagarde, who will host the two-day Group of 20 meeting from Friday evening, said she also favoured a freer exchange rate for China's yuan -- the focus of heated debate between Beijing and Washington on currencies and their impact on trade balances.
Mexican central bank governor Agustin Carstens, addressing the same conference, said the world economy would benefit if Asian economies all had flexible exchange rates.
"In the case of Asian economies, flexible exchange rates are what needs to take place," he said.
China has resisted U.S.-led pressure for an early and significant appreciation of the yuan, preventing the G20 from making any reference to its currency, but has allowed its exchange rate to rise gradually since last June.
This week's meeting will showcase debate on French President Nicolas Sarkozy's ambitious agenda for his G20 stewardship, which at its launch in November included proposals to curb food and fuel price volatility and gradually reduce the world's dependence on the dollar.
Amid divisions over plans to regulate commodities markets and redraw the monetary system, France is pinning its hopes on nailing an accord on measuring imbalances in the world economy, where the G20 nations account for around 85 percent of GDP.
The IMF report prepared for the meeting said a two-speed world economic recovery had taken hold, posing contrasting problems for policymakers in developing and developed nations.
"External imbalances as we see it have now increased and are likely to grow further," IMF deputy managing-director John Lipsky told a preparatory meeting of G20 deputies. "I may say that static policies will lead to even higher imbalances."
GLOBAL BALANCE IN EVERYONE'S INTEREST
Lagarde said earlier that economic imbalances had been redressed somewhat during the major downturn of recent years but were growing again as the economy recovered.
"That can't go on too long ... As is often the case with big imbalances, a system collapses," she told France Info radio.
The big picture of imbalances was a world where China saved and exported, Europe consumed and the United States borrowed and consumed, and this was where the G20 needed to make progress to make sure there was an element of equilibrium, she said.
"We can start towards that with these indicators," she told France Info.
"It can also be addressed through monetary channels, by seeing to it for example that the Chinese currency is not as controlled as it is now and that it also becomes an international, convertible, floating currency, as are most currencies in developed countries."
G20 countries have been working for some time on ways of working together to correct mismatches in the global economy following the worst downturn since World War Two but have yet to reach agreement on the starting point -- which indicators they should base such policy decisions on. (Writing by Paul Taylor, editing by Mike Peacock)