France's cabinet on Wednesday approved a law paving the way for the government to guarantee over one third of Franco-Belgian lender Dexia SA's potential losses on toxic debt, as called for in a rescue deal inked early this week.

The agreement, a key plank of a broader bailout of the bank which has outstanding loans to hundreds of French cities and towns, is due to be submitted for approval by the lower house of parliament on Monday and the upper house next Wednesday.

A finance ministry source said the law will call for France to guarantee up to 33 billion euros ($45 billion) in interbank and bond borrowing by Dexia and its Dexia Credit Local unit which provided the municipal government loans.

Dexia guarantees will be provided at market rates, said the source, speaking on condition of anonymity.

That is in line with a cross-border rescue plan announced on Monday, which involves a financing guarantee of 90 billion euros in all, of which 60.5 percent is to be provided by Belgium, 36.5 percent by France and 3 percent by Luxembourg.

The French bill also clears the way for French state bank Caisse Des Depots, which is taking over Dexia Credit Local's French lending business and will also guarantee 10 billion euros in local authority loans made by Dexia Municipal Agency (DexMa), the bond issuing unit of DCL.

This guarantee, the ministry source said, focuses on some of risky, or possibly toxic, structured loans and would cover losses exceeding 500 million euros, with the French state taking 70 percent of such losses and Dexia the other 30 percent, according to the source.

Dexia is sole guarantor on losses up to that threshold of 500 million euros, the source said.

The plans will have no impact on the public deficit, the source added.

In parallel, Dexia and Caisse des Depots are discussing who would take any losses incurred on a separate but less risky portfolio of local authority loans totaling some 70 billion euros not covered by the overall rescue plan, the source said.

($1 = 0.733 Euros)

(Reporting By Jean-Baptiste Vey; Writing by Brian Love; Editing by Christian Plumb and David Holmes)