President Nicolas Sarkozy, who is staking his re-election on persuading voters he can nurse the economy back to health, has torn into France's bloated welfare state as he lay foundations for a 2012 campaign based on restoring competitiveness.

In a speech to the nation late on Thursday that analysts saw as paving the way for his candidacy next year, Sarkozy blamed an outdated social model and the limitations of the 35-hour work week introduced by the left for holding France back.

The centre-right president, desperate to avoid a downgrade of France's AAA credit rating as the euro zone crisis strains public finances, said it was now urgent to overhaul the way the country's costly welfare system is financed, saying it could no longer be done solely by taxing workers and their employers.

He said the French needed to work longer hours and the state would continue to rein in spending by cutting public sector jobs through attrition. Between earning less and working more, I believe the second solution is better than the first, he said.

While he did not promise a reform of the 35-hour week, he said he would call union leaders for talks in January to discuss how to boost competitiveness and employment. Jobless numbers hit a 12-year high in October, taking the ILO unemployment rate to 9.3 percent for the third quarter.

He may be trying to prepare public opinion for some big announcements, calculating that we are now on a cliff edge and that the French people know that, said analyst Jerome Fourquet at pollster IFOP.

These issues would be unpopular and hard to manage, but Sarkozy seems to want to take action. In this crisis he seems to want to be the person, like Winston Churchill, to announce the blood and tears and the efforts that must be made.

PROSPECTS GRIM

Next April's is looming as the euro zone crisis has pushed France to the brink of a recession, driven up government borrowing costs and left French banks crippled by their exposure to debt-laden euro zone peripheral countries.

The OECD said this week that French unemployment could hit 10.4 percent by the end of 2012 and saw no room for economic stimulus without endangering France's AAA rating.

The main aim of Sarkozy's speech, delivered in the same town of Toulon where he railed in 2008 against unfettered capitalism, was to convince voters the euro bloc needs more central control over national budgets if the single currency is to survive.

He said French sovereignty would not be eroded by reinforcing euro zone governance and said governments, not supra-national bodies, would hold sway over public finances.

Opposition Socialists - whose candidate Francois Hollande is well ahead of Sarkozy in opinion polls - accused Sarkozy this week of hatching plans with German Chancellor Angela Merkel to give Brussels the power to overrule governments on budgets.

Fighting back, Sarkozy berated the left for wanting to cut back on nuclear power, saying that would undermine energy independence. He also said immigration must be better controlled, in a sign that both those issues will be high on the election agenda.

French media read Sarkozy's speech as his first appearance as a candidate for 2012. While he is not expected to confirm he will run until as late as February, his party is furious at the publicity the Socialists gained from a lengthy primary contest.

Sarkozy warms up in Toulon, Le Parisien daily declared.

Hollande's election platform includes modifying Sarkozy's 2010 pension reform, which ended full retirement at 60, and creating 60,000 public sector jobs - measures the ruling UMP party says would be painfully expensive.

Sarkozy has lagged Hollande in polls for months, but his assertiveness on the euro crisis has helped him narrow the gap in recent weeks. An Ifop survey published on Thursday found 29.5 percent of respondents would chose Hollande in a first-round election, ahead of 26 percent for Sarkozy.

Painting himself on Thursday as the man to lead France through more euro zone turmoil, Sarkozy said closer integration was the only way to save Europe from economic ruin.

He said faster and more automatic sanctions must be applied to states that flout budget commitments and all euro states must enshrine budget-balancing rules in their constitutions.

Europe could be swept by the crisis if it doesn't pull itself together and change, he said.

(editing by David Stamp)