Financial officials of the Group of Seven rich nations, which dominated global policymaking for decades, were set Saturday to discuss a diminished future for their group as it grappled with tensions over currency rates.

The G7 has been eclipsed during the credit crisis by the larger Group of 20, which includes rising powers such as China and India. G7 finance ministers and central bank chiefs, meeting in Istanbul, were expected to try to come to terms with that shift.

The G7 is not quite dead, but it is losing its relevance, the International Monetary Fund's managing director, Dominique Strauss-Kahn, was quoted as saying by Emerging Markets magazine. It's on its way to extinction.

Other officials suggested the G7 would continue to exist, but with a much smaller role.

We will talk about how the G7 will work on, how its role will be in the future, German deputy finance minister Joerg Asmussen said. The G7 might best refocus on preparing for G20 gatherings from now on, he added.

One G7 official, speaking on condition of anonymity, said Washington wanted to see the G7 supplanted by a Group of Four that would comprise the United States, Europe, Japan and China.

A U.S. Treasury spokeswoman declined to comment, and it was unclear how much progress the G7, which comprises the United States, Japan, Britain, Germany, France, Italy and Canada, could make in the diplomatically sensitive and complex task of restructuring itself.

CURRENCIES

But differences over how to handle exchange rates underlined the G7's difficulties in managing the recovery from the crisis.

Persuading China to appreciate its tightly controlled yuan is widely seen as crucial to correcting trade imbalances and reducing the risk of another crisis, but China is not a member of the G7.

Canadian Finance Minister Jim Flaherty said global currency talks therefore needed to extend beyond the G7. But Bank of Japan Governor Masaaki Shirakawa said the G7 remained a more convenient forum to discuss currencies than the G20, because G7 members, unlike China, had major financial markets.

Meanwhile, China showed no sign of heeding suggestions that it let the yuan appreciate. It has kept the currency almost flat against the dollar since mid-2008.

Our exchange rate policy is very clear, Yi Gang, a Chinese central bank vice governor who was present in Istanbul for IMF meetings, told Reuters. He said the policy would continue to emphasize stability.

Asked whether China had been facing more pressure from other countries to let the yuan appreciate, he said: We will continue our policy setting.

RECOVERY

Several officials said a sustained recovery of the global economy was not yet certain, despite the IMF's forecasts of growth across much of the G7 and elsewhere in the second half of this year and in 2010.

Poor U.S. economic data earlier in the week cast doubt on the strength of the recovery. The Labor Department announced on Friday that the U.S. unemployment rate rose to a 26-year high of 9.8 percent in September from 9.7 percent in August.

German Bundesbank President Axel Weber said Europe's biggest economy would take years to recoup the growth lost since gross domestic product started to contract there and in most of Europe in the second quarter of last year.

We will return around 2013 to the economic level we had 2008, he told reporters. Because of the finance crisis, the German growth potential seems to have decreased to around 1 percent compared to around 1.5 percent before.

British finance minister Alistair Darling said that to avoid future crises, the G20 needed to ensure countries around the world met minimum standards in their financial regulation, so that weakness in one nation could not cause problems for others.

In an interview with Emerging Markets magazine, Darling said the G20 might blacklist countries that had lax regulation and impose sanctions on them, mirroring its crackdown on tax havens, which was launched earlier this year and has already prompted some countries to roll back banking secrecy laws.

(With reporting by Louise Egan, Simon Rabinovitch, Anna Willard, Sumeet Desai and Leika Kihara; Editing by Andrew Torchia)

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