Banking's global lobby group on Wednesday called for a halt in new regulation to prevent a sharp contraction in credit in Europe and other major economies that would hammer growth and jobs.

The Institute of International Finance (IIF) said higher capital requirements for banks could see credit to businesses in the euro zone fall by at least 5 percent, and urged regulators to make them a temporary measure.

Policy makers should call a halt to the introduction of new regulation while the core elements of reform, such as increases in equity capital and recovery and resolution arrangements, are put in place, said Charles Dallara, managing director of the IIF, which represents more than 450 financial firms around the world.

Dallara, who is representing private sector investors in a deal to halve the nominal value of their Greek government bonds as part of a rescue plan for the troubled country, said he was confident there would be strong participation in that deal.

Technical discussions had begun, but they were not at the level of in-depth negotiations, he said.

He declined to say whether a shock referendum on the bailout plan announced by Greece's prime minister would delay the bond offer.

He said the IIF would not pre-judge the outcome of the vote and its focus was on agreeing the technical details.

The voluntary plan could put Greece on the path to debt sustainability, Dallara said.

It means that the adjustment that lies ahead will be less austere, less onerous and shorter. They (Greek population) have an opportunity to move out of the period of austerity and into a period of growth at an earlier stage, he told reporters on a conference call.

It would also help bring in new investment and unlock market access for Greece, possibly as early as 2015, Dallara said, potentially reducing the long-term burden on eurozone taxpayers.

HIGHER CAPITAL BAR

Plans to introduce tougher rules on liquidity ratios are badly in need of reformulation and other measures, such as a capital surcharge for the world's biggest banks, will be costly and counterproductive, Dallara said.

It was inevitable that many European banks will shrink their assets in the face of tougher capital rules and higher funding costs, he said. Some banks cannot raise new capital in the market, and the cost of raising capital is prohibitive for those that can.

Neither bank capital nor long-term funding can be raised in the quantities implied by the totality of current requirements without significant cost implications, Dallara said.

This highlights the risk that financial sector deleveraging will continue, with serious implications for the cost and availability of credit, and hence for economic activity and jobs.

Bank lending to non-financial businesses in the euro zone rose just 1.4 percent in the first nine months of this year, the IIF estimated. This could contract by 5 percent or more to meet the capital ratios demanded by European lenders last week.

Those tougher standards require banks to raise 106 billion euros (91 billion pounds) of extra capital by mid-2012.

BNP Paribas, Societe Generale and other banks across Europe are already cutting back on lending as regulators pressure them to lift capital ratios and investors demand higher profitability.

Banks have for some time said this could derail economic growth, and Dallara warned of the threat in an open letter to French President Nicolas Sarkozy before a G20 summit of major world economies in France on Thursday and Friday.

More effective backstops for eurozone sovereign debt are urgently needed and the hunt for outside investors to boost the EFSF rescue fund needs to be expedited, Dallara said.

It was also essential the European Central Bank remains active in the secondary government bond market to help stabilise markets, the letter said.

The market value of the debt of troubled countries was likely to decline further as banks unload their sovereign bonds, Dallara warned.

The IIF said G20 leaders need to work with banks to revitalise economic growth and create jobs, against a difficult backdrop not just for Europe, but also in the United States, where the budget debate was also a significant concern.

(Reporting by Steve Slater; Editing by Alexander Smith)