Steinbrueck, popular with the middle-of-the-road voters his centre-left Social Democrats (SPD) hope to win back in the 2013 election, told the Sueddeutsche Zeitung newspaper's Saturday edition that he backed SPD chairman Sigmar Gabriel's recent call for common debt issuance and closer fiscal integration.

"The party chairman is right about that and the development will go in this direction," Steinbrueck said, adding the European Union will have to be able to intervene directly more strongly than before in the fiscal policies of struggling countries.

Steinbrueck, known for his blunt manner, criticized those leaders in Merkel's centre-right coalition who have dismissed the SPD's proposals for common debt issuance as "debt socialism".

"They're being featherbrained," Steinbrueck said, adding that the euro zone already had become a 'Haftungsgemeinschaft' (community of liabilities).

Italy, Spain and France have been urging for the introduction of common debt issuance, such as euro bonds, as a way to counter the crisis of confidence on financial markets that has sent borrowing costs in those countries soaring to unsustainable levels.

But Germany, which has seen its borrowing costs fall, has opposed any joint issuance of debt, with Merkel's ruling coalition arguing it would take pressure away from those countries to enact reforms to their economies and cut state spending.

Merkel's coalition, however, has had to rely on SPD support to win approval of euro zone bailout measures because of a growing number of rebels in her ranks. She also needs opposition support in the upper house of parliament, where her coalition no longer has a majority.

Steinbrueck took his time to endorse the proposal from Gabriel, who is popular among the SPD's left wing. But after it won support from SPD parliamentary floor leader Frank-Walter Steinmeier, a moderate and another potential challenger to Merkel, Steinbrueck finally gave his blessing.

It is an endorsement fraught with risk for Steinbrueck and the SPD, eager to return to government after falling out of power in the 2009 election, as opinion polls show an overwhelming majority of Germans are opposed to the issuance of euro zone bonds.

Steinbrueck said the euro zone crisis had led to giving the European Union two choices: either the national states give up more of their sovereignty to Europe or move towards a "re-nationalization".

"That would be a fatal way to go" for an export nation like Germany, Steinbrueck said.

(Reporting By Erik Kirschbaum; Editing by Jon Loades-Carter)

• A Permanent Economic Emergency