* China rejects exchange rate and reserves criteria
* Japan says G20 split on how to measure global imbalances
* Fed, BoJ defend loose monetary policy
(Recasts with Chinese minister, talk of compromise)
By Toni Vorobyova and Gernot Heller
PARIS, Feb 18 (Reuters) - China rejected plans to use real exchange rates and currency reserves to measures global economic imbalances, casting doubt on the ability of Group of 20 major economic powers to reach agreement at a meeting on Friday.
Speaking shortly before the start of the two-day meeting of finance ministers and central bankers, Chinese Finance Minister Xie Xuren also said the G20 should use trade figures rather than current account balances to assess economic distortions.
"We think it is not appropriate to use real effective exchange rates and reserves," Xie said at a meeting with Russian, Brazilian and Indian counterparts, who collectively make up the BRIC group of major emerging economies.
"Emerging markets, to deal with financial crises and economic shocks, they need to set up a certain amount of reserves," he said.
The hardline Chinese stance highlighted splits over how to define economic imbalances and prescribe action to avoid future financial crises, although negotiators said several compromise proposals were under discussions.
Japanese Finance Minister Yoshihiko Noda said he was not sure there would be any agreement this weekend on a set of indicators, as G20 president France had hoped.
"It is uncertain whether the countries will agree on all indicators, but I think agreement on some is possible," Noda told reporters. "From working group discussions, I get the impression countries are now split in half about their opinions."
Differences over the causes of and ways to cure global economic imbalances were also on display at a public debate among the world's top central bankers on Friday.
Bank of England Governor Mervyn King, reflecting the view of many Western policymakers, said the world risked protectionism or another financial crisis if policymakers failed to reduce currency distortions and other imbalances.
Chinese central bank governor Zhou Xiaochuan said Beijing would decide the pace of the appreciation of the yuan on its own and would not be swayed by pressure from other countries. Simply adjusting exchange rates would not influence Asians' savings behaviour, he said.
"A reform of the international monetary system is in order so as to prevent the over-concentration of foreign assets in one particular currency," he said in a reference to the dollar, urging greater use of IMF Special Drawing Rights instead.
TWO-STEP
Germany, the world's number two exporter after China, said it had no problem with including a balance of payments indicator as part of a set of five measurements. Deputy Finance Minister Joerg Asmussen said a "vast majority" of G20 countries wanted a deal all five indicators.
One European source said a possible compromise could involve listing the other indicators -- exchange rates, currency reserves, public debt and deficits, and private savings -- while making clear the prime focus would be on current accounts.
Another option mooted by deputy finance ministers would be to give China an opt-out from the balance of payments criterion, allowing it to use its trade balance instead, two sources involved in the negotiations said.
France has run into opposition with its push for greater transparency and regulation of commodities prices and a reform of the international monetary system and is pinning its hopes on measuring imbalances in the world economy, where the G20 nations account for around 85 percent of GDP.
Finance Minister Christine Lagarde said she hoped the first ministerial meeting of France's year-long G20 presidency would agree a preliminary list of indicators in a two-step process leading to guidelines for unwinding distortions later this year.
With world shares near 30-month highs, driven by bullish views of economic growth, investors seem content for the G20 to take its time, whereas at the height of the crisis two years ago markets were baying for policy action.
"Some may view this sort of outcome as a lost opportunity to prevent future risks, but markets would probably not welcome a heavy-handed attempt to subjugate domestic priorities for the sake of external balance, which could be disruptive unless done just right," Barclays Capital wrote in a research note.
In a public debate before the G20 meeting, the U.S. and Japanese central bankers defended their easy money policies against criticism from some emerging countries that they were fuelling disorderly capital flows and commodity prices.
U.S. Federal Reserve Chairman Ben Bernanke said faster growth in emerging markets and "the maintenance of undervalued currencies by some countries" had contributed to price rises and unsustainable patterns of global spending.
Bank of Japan Governor Masaaki Shirakawa acknowledged that loose monetary policy in the developed world was pushing capital into emerging economies and helping inflate commodities prices but said it was necessary nonetheless.
Emerging powerhouses China and India have already raised interest rates to combat inflation and emerging powers complain that "hot money" risks destabilising their economies, pointing the finger at the Federal Reserve's money printing to pump prime its economy via a $600 billion bond purchase programme.
PRESSURE ON YUAN
In a paper prepared for the two-day G20 meeting, the International Monetary Fund said euro zone debt tensions still posed a threat to global recovery, while fast-growing emerging nations risked overheating and surging food prices posed an inflationary risk.
The U.S. quantitative easing could cause a destabilising flood of capital -- the charge levelled by China and others -- the IMF said, though it conceded this had not happened so far.
U.S. Treasury Secretary Timothy Geithner has been urging China to let the yuan rise more swiftly, something Washington says is vital for balanced global growth.
But People's Bank of China Governor Zhou said: "External pressure has never been an important factor of consideration and we have never paid special attention to it." (additional reporting by Gui Qing Koh, Catherine Bremer, Toni Vorobyova, Glenn Somerville, Daniel Flynn; Writing by Paul Taylor; editing by Mike Peacock)