* Ministers pledge more flexibility for rescue funds
* EU to agree "shortly" on cheaper loans, longer terms
* Ministers no longer explicitly rule out selective default
* Threat to Italy, Spain increases sense of urgency
By Julien Toyer and Daniel Flynn BRUSSELS, July 11 (Reuters)
Euro zone finance ministers promised cheaper loans, longer maturities and a more flexible rescue fund on Monday to help Greece and other EU debtors in a bid to stop financial contagion engulfing Italy and Spain. They also declined to rule out the possibility of a selective default by Greece to make its debt mountain more sustainable, despite the European Central Bank's fierce opposition, one participant said. After talks following another day of turmoil on financial markets, ministers from the 17 countries that share the European currency vowed to safeguard stability in the euro area and promised new measures "shortly", but set no deadline. "Ministers stand ready to adopt further measures that will improve the euro area's systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate," they said in a statement.
[ID:nB5E7I400W] Italian and Spanish stocks and bonds suffered another big selloff on Monday and the euro <EUR=> fell as investors rattled about an apparent deadlock in the EU on how to involve private bondholders in a second rescue package for Greece. The Italian slide was triggered last week by concerns that Prime Minister Silvio Berlusconi was trying to undermine and perhaps remove Finance Minister Giulio Tremonti, seen as the guarantor of fiscal prudence in Rome. Italy, the third largest economy in the euro zone, has the second biggest per capita debt after Greece but has avoided the fate of Greece, Ireland and Portugal, forced to seek EU/IMF bailouts, because it has a low budget deficit and a liquid bond market largely in domestic hands. The ministers gave no indication that they had broken a stalemate over how to make banks, insurers and other funds share the cost of additional funding for Athens. But one national official said they were moving closer to sharing the cost of easing Greece's debt burden with investors even if credit ratings agencies were to declare a selective default. "I would read this as an acknowledgement by the member states that a selective default is going to be difficult to avoid. It removes an obstacle to the participation of the private sector," the official said, speaking on condition of anonymity. Ministers tasked a working group to propose ways to finance a new multi-year programme for Greece, reduce the cost of servicing its 340 billion euro debt -- nearly 160 percent of annual output -- and improving its sustainability. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^