PITTSBURGH - President Barack Obama arrived at the Group of 20 summit in Pittsburgh on Thursday with an ambitious agenda to crack down on banks' risky behavior and rebuild the global economy on a more stable footing.

The White House said regulatory reform remained the top priority, trying to assuage concerns by German Chancellor Angela Merkel who warned that a U.S. drive to rebalance the global economy risked distracting the G20 from a more urgent need for market regulation.

I don't think they're in any way mutually exclusive, White House Spokesman Robert Gibbs said.

Merkel's remarks in Berlin underscored differences between some of the world's largest economies as she, Obama and other G20 leaders headed for talks on Thursday and Friday on how to respond to the global financial crisis.

Police used pepper gas to disperse a protest by 2,000 people about a mile from the cordoned-off convention center where the talks were taking place.

The sheer volume of problems the two-day summit is set to address -- from the lopsided global growth model to tougher rules for banks and bankers' pay, plus climate change -- prompted low expectations for any near-term action.

But there was broad consensus that tougher, coordinated regulation was needed to avoid a repeat of the two-year crisis that cost millions of people their jobs and forced governments to put up trillions of dollars in taxpayer money to prop up a faltering financial system.

We do know that unless we all have greater rules for the road, money can fly and transfer anywhere, Gibbs said. So if there are weaker rules in one place but everyone else is taking concerted efforts, you don't have a defense against what happened happening again.

NO CAP ON BANKER BONUSES

Aides were still grappling over the precise wording for a statement to be issued at the summit's conclusion on Friday detailing the G20's commitments. The G20 groups the world's major rich and emerging economies.

A G20 source told Reuters a draft version of the statement did not include a firm cap on bankers' bonuses, something France had pushed for early on before backing down amid objections primarily from the United States and Britain.

France and Germany want curbs on bonuses they say fostered huge risk-taking and helped cause the turmoil on financial markets that shoved the world economy into recession.

Diplomats said talks were moving toward establishing an overall link between the profits a bank makes and the health of its balance sheet to the amount of money it can put into a pool for bonuses.

The G20 source said the draft document contained no figures on funding to fight climate change, another source of tension as some European leaders complain about slow progress.

The one sign of progress in climate change discussions was on phasing out subsidies for fossil fuels. The G20 source said the draft statement mentioned phasing them out in the mid-term but included no precise dates.

Merkel, on track to win a second term in an election on Sunday, said the world's leading countries were making progress on financial reform and should not shy away from measures that might prove unpopular with the banking industry, where the economic crisis began.

I have made clear we should not look for other topics and forget about financial market regulation, she said. Imbalances are an issue. We must have imbalances and all the possible causes on the agenda.

Echoing Merkel, Japanese Prime Minister Yukio Hatoyama said his country wants to play a part in crafting global rules to rein in excessive money-making games. [ID:nN24457904]

The United States, the world's largest economy and the epicenter of the global crisis, wants G20 countries to commit to reducing reliance on U.S. consumers by boosting consumption in exporting countries, such as China, while encouraging debt-laden nations such as the United States to save more.

Export giant China has given only qualified support for the idea of policing global imbalances.

Rich countries were pressing big developing nations on Thursday to increase domestic demand but it was still an open issue, an Italian diplomat said.

WORKING ON DRAFT

A draft communique was half-completed. Officials agreed it would say there are signs the global recession is ending but it will also stress the need to continue with economic stimulus measures, the Italian diplomat said.

The International Monetary Fund has been urging G20 leaders to keep stimulus plans in place while millions of people who lost their jobs during the crisis remain out of work.

South Korea said it was too early to discuss an exit strategy. It's too premature. That's our absolute position, South Korean Finance Minister Yoon Jeong-hyun told Reuters.

In another sign of increasing stability, major central banks announced they planned to scale back massive injections of U.S. dollars into their banking systems that were part of efforts to shore up crisis-hit economies.

Separately, European sources said the United States was opposed to setting an early 2010 target date for a long-sought breakthrough in the Doha round of world trade talks.

European diplomats say the Obama administration is too focused on getting contentious plans for U.S. healthcare reform through Congress to risk further battles with lawmakers over a trade deal that could upset agricultural and business lobbies.

Now that the recession in many countries appears to be ending, the challenge is to sustain the sense of urgency felt in April when the G20 agreed to work together to rescue the world economy and pledged hundreds of billions of dollars to finance crisis-fighting by the IMF.

(Reporting by Reuters G20 team; Writing by Emily Kaiser and John O'Callaghan; Editing by Frances Kerry)

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