World leaders will warn this week against taking the global economic recovery for granted while also noting that the huge costs of stimulus could hurt long-term growth, a draft G20 document shows.

The Group of 20, which meets in Toronto this weekend, has won credit for preventing a global recession in 2008 from becoming a depression. But as the economy recovers, G20 unity is fraying.

The group must still forge consensus on controversial topics such as how quickly to shrink government deficits, how best to strengthen banks so that they can withstand any new downturn, and how to harmonize financial regulatory reforms.

The draft version of the summit communique, obtained by Reuters and dated June 11, reflected divisions over which policy priority ought to take precedence -- supporting still-shaky growth or shrinking budget deficits.

Bank of Canada Governor Mark Carney said governments must plan for austerity but not rush to tighten belts all at once.

It's a question of getting the balance right, Carney said in an interview with Reuters Insider.

Nobody should be looking to balance their budget next year. Nor should anybody be in a position where they think there's no need to start laying out a plan to stabilize their debt position, the United States included.

Europe's simmering debt troubles are a reminder that when markets lose faith in governments' ability to rein in spending, borrowing costs soar and countries are forced into swifter, harsher fiscal fixes.

'UNEVEN AND FRAGILE' RECOVERY

While the economy looks healthier than it did when G20 leaders met in Pittsburgh in September last year, there are signs that the recovery may have hit a plateau.

Unemployment remains high in the United States and Europe, the U.S. housing market at the center of the financial crisis is weak, and a gauge of European services activity cooled more than expected in June.

The G20 draft said the recovery was uneven and fragile and warned: There is no room for complacency.

At the same time, it said fiscal challenges in many states are creating market volatility, and could seriously threaten the recovery and weaken prospects for long-term growth.

The United States has warned against withdrawing supports too soon, mindful of when the government slammed the brakes on spending in the 1930s, prolonging the Great Depression.

We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth, U.S. Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers wrote in the Wall Street Journal.

European countries, led by Germany, argue that fiscal restraint breeds confidence which in turn sustains growth.

An EU diplomat said fiscal targets proposed by Canada were too modest and some rich G20 countries should do more.

We are wary of these targets, the diplomat said. This is a minimum, a number of advanced economies should go further than that.

Canada wants the G20 to agree to halve budget deficits by 2013 and stabilize or cut debt-to-GDP ratios by 2016.

Striking a balance between growth and healthy public finances is vital also for the world's developing economies whose rapid expansion in recent years has made them key players at the G20, now the top table for managing the world economy.

We disagree that some countries have to grow while others hit the brakes. Every nation has to grow, said a Brazilian official involved in preparations for the summit.

The World Bank urged the G20 to focus on long-term growth to help developing countries which rely on revenues from commodity exports, worker remittances, foreign direct investment and aid.

REFORMING BANK RULES

The G20 document said further steps were needed to address the underlying causes of the global financial crisis and promote more responsible and transparent banking sectors, a nod to the heavy lifting still needed on regulatory reform.

The U.S. Congress was racing to finalize a reform bill, but one of the biggest issues -- bank capital rules -- was left to the G20 to agree. The United States wants tougher requirements to be phased in from 2012 but some European countries, fearful they crimp lending, have pressed for a slower implementation.

Geithner and Summers praised Europe's decision to publish results of bank stress tests designed to show how well financial firms could withstand further losses, but said it was critical that banks hold more capital.

Those capital rules are likely to be hashed out in detail only later this year.

The European Union formally requested in a letter on Wednesday that the G20 explore a tax on banks and financial transactions.

Canada has led opposition to bank taxes, arguing that there is no need for a one-size-fits-all rule because some countries weathered the financial crisis well.

The draft said the G20 would push for conclusion of a long-delayed world trade deal and would pledge to extend a commitment not to raise barriers to investment or trade for three more years, through 2013.

Where any protectionist measures have been enacted in the context of the economic crisis, we agree that these should be lifted, the document said.

The G20 groups the world's biggest economies and covers two-thirds of the world's population. It includes Australia, Argentina, Brazil, Indonesia, Japan, Mexico, Russia, Korea, Saudi Arabia, South Africa, and Turkey in addition to the big European economies, the United States and Canada.

(Additional reporting by Louise Egan in Toronto, Jan Strupczewski in Brussels, Natuza Nery in Brasilia; Writing by Emily Kaiser and William Schomberg, Editing by Andrew Hay)

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