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PARIS, Oct 1 (Reuters) - France's European Affairs Minister Jean-Pierre Jouyet said on Wednesday the European Central Bank should set rates in light of the financial markets crisis, which he believes could last another year.

Jouyet stopped short of calling for an interest rate cut but said it would take months for measures aimed at reversing the damage done by the crisis to take effect.

"It is up to the European Central Bank, which will intervene in light of the impact of the crisis both on the level of prices and on the level of (economic) activity, to say what consequences it draws from it as far as the level of its interest rates is concerned," he told France Inter radio.

Jouyet declined to clarify whether he was calling for a rate cut but said the turmoil would have a bigger impact on the real economy in Europe than in the United States and would hurt employment and other elements of the real economy for months.

"This is something which is not behind us," he said.

"It is clear that this crisis will have effects for a certain time on the real economy regarding employment, purchasing power, credit, and that there are difficult periods on the international level which can indeed last until next autumn, that is to say a year," he added.

Risks to the financial sector also persisted.

"There can still be accidents. We have said very clearly for our part that we will respond to these accidents each time by intervening and that we will not accept bankruptcies in the banking system given the domino effects and the systemic risks which that could entail," Jouyet said.

THE STATE IS BACK

The U.S. House of Representatives on Monday rejected a $700 billion bailout package for Wall Street firms, but Jouyet said he hoped the plan would be passed by the end of the week.

European leaders would also spend much of their Oct. 15 meeting in Brussels discussing the impact of the financial crisis and deciding how to reinforce market regulation, he said.

"We must move towards a European policeman regarding how markets function, the supervision of banks and insurers," he said, adding the ECB's role as a banking supervisor should also be strengthened.

EU leaders would also take measures to curb naked short-selling, where market players short a stock without first borrowing the shares from another investor. The practice has already been suspended on many European stock exchanges.

"Measures will be taken at European level to limit them," he said.

French President Nicolas Sarkozy has also called for a summit of leaders of the Group of Eight (G8) industrialised nations and some of their counterparts from emerging economies by the end of the year to discuss overhauling the financial system.

"In the face of this crisis, we need international regulation which will crystallise notably during the G7 finance ministers' meeting which will take place in a week on the sidelines of the annual meetings of the (International) Monetary Fund and the World Bank," Jouyet said.

"It is the return of the state. It is the return of political authority. And that doesn't bother me at all. I have long called for greater regulation and intervention in this area," he added.

(Additional reporting by James Mackenzie, editing by Swaha Pattanaik) Keywords: spFRANCE ECONOMY/JOUYET

tf.TFN-Europe_newsdesk@thomson.com

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