By Sarah Marsh and Noah Barkin
BERLIN (Reuters) - German Chancellor Angela Merkel's cabinet approved new powers for the euro zone's bailout fund on Wednesday, but she faces an uphill battle to convince party skeptics to back efforts to contain the crisis.
Concerned that Germany's parliament has little control over the European Financial Stability Facility (EFSF), some members of Merkel's center-right coalition are threatening to oppose boosting its powers when the Bundestag (lower house) votes on September 29.
If enough conservatives rebel and Merkel is forced to rely on opposition parties to pass the legislation, she could face pressure to dissolve parliament and call early elections, although the chances of that seem slim.
"I've reached the point that I just can't support this anymore -- pushing off enormous risks into the future," said the most prominent dissident, Wolfgang Bosbach, who is normally a party loyalist with impeccable conservative credentials.
Bosbach told Reuters he did not relish the risk of a vote of confidence in Merkel, but was no longer prepared to rubber-stamp aid for heavily indebted countries such as Greece with measures that could cost future generations dearly.
"I haven't taken any polls. But there are millions of people in the public and hundreds of thousands in the party who have a similar critical view," he said.
Euro zone leaders last month agreed to boost the effective size of the EFSF to 440 billion euros ($635 billion) and give it extra powers, including a potential role in helping to recapitalize banks.
In a sign of how important the current debate in Germany is for investors, news of the cabinet approval pushed the euro up to session highs against the dollar.
There are fears that if Berlin insists on parliament having a greater say in the EFSF, other countries will too, limiting the fund's ability to act swiftly to save stricken states.
"It has to be possible to put the rescue mechanism into operation without having to hold a big public debate in the Bundestag," said Merkel's floor leader in the lower house, Volker Kauder.
But Oskar Niedermayer, a political scientist at Berlin's Free University, said events in Germany showed "governments in the euro zone can no longer assume they can take decisions that affect their citizens very closely without consulting their parliaments."
A poll presented to senior center-right MPs suggested that ever more Germans are doubting the euro, with 76 percent saying they had little or no faith in the currency, up from 71 percent in a survey by Allensbach pollsters two months ago.
Faltering economic growth in the 17-nation euro zone risks prolonging the debt crisis, which began nearly two years ago and has spread from peripheral states such as Greece, Portugal and Ireland -- all of which have received bailouts -- to bigger economies like Spain and Italy.
German Finance Minister Wolfgang Schaeuble said an expanded EFSF that would have powers to intervene in bond markets and provide precautionary credit lines to troubled member states would help the bloc "prevent contagion in a timely fashion."
European economist Silvio Peruzzo at RBS in London said it was vital to get new powers for the EFSF passed swiftly because committing real resources "sends a very strong signal of reform momentum in the euro area."
"Our working assumption at the moment is that Germany is fully on board to give the EFSF new powers. But we are at a point where the political capital is being tested," he said.
With nearly two dozen lawmakers from Merkel's center-right reported to be considering voting against the stronger EFSF, conservative leaders have come up with a proposal to assuage fears the Bundestag will be bypassed on future aid decisions.
Norbert Barthle, chief budget expert for the bloc, told Reuters his plan should mollify legislators without adding to the contagion risk by introducing lengthy legislative hurdles.
German lawmakers have so far had only a consultative role in deploying rescue funds, voting in resolutions giving Merkel political support but which did not have the power to stop the payouts. Their insistence on having more influence should be upheld by Germany's top court next week.
In a ruling on lawsuits brought by six euroskeptics, legal experts expect the Constitutional Court to say on September 7 that Berlin broke no laws by contributing to the bailouts, but that parliament should be consulted more.
As Europe's biggest economy, Germany foots more than a quarter of the bill for euro zone bailouts.
NOT THE FINAL HURDLE
The Bundestag vote on September 29 will be followed by a vote in the upper house (Bundesrat) the next day, which would allow ratification of the EFSF by the end of the month as Merkel and French President Nicolas Sarkozy have promised.
Under Barthle's proposal, the Bundestag budget committee would be informed of minor EFSF decisions but there would be a fuller parliamentary consultation in other cases.
Merkel's conservative coalition has 330 seats in the 620-seat Bundestag. If 20 or more of her allies dissent, she may be forced to rely on leftist opposition parties -- the Social Democrats (SPD) and Greens -- to pass the measures.
"I think Merkel will get the majority she needs simply because the pressure is so high," said Niedermayer. "Lawmakers know that if they don't deliver that, there is a chance of the coalition falling apart, leading to new elections."
The coalition parties themselves will write up the draft law and present it to parliament to speed up the ratification procedure and ensure it is passed by month end.
Even then, Merkel's euro zone worries will be far from over. This month Germany also starts discussing the permanent bailout fund that is to become operational in mid-2013, the European Stability Mechanism (ESM), which has to be ratified by year-end. ($1 = 0.693 Euros)
(Additional reporting by Thorsten Severin; Writing by Stephen Brown and Noah Barkin; Editing by David Stamp)