Last Tuesday Euro zone finance ministers and the IMF approved a package of measures including interest rate reductions and an extension of repayment periods aimed at cutting Greece's public debt to 124 percent of national output by 2020.

Germany insists a writedown of Greek debt held by euro zone governments would be illegal, though Finance Minister Wolfgang Schaeuble has also recently signaled that some kind of debt 'haircut' for official lenders might be needed eventually.

"If Greece one day handles its revenues again without taking on new debt, then we must take a look at the situation and assess it. That is not going to happen before 2014/2015 if all goes to plan," Merkel told the Bild am Sonntag newspaper.

The prospect of the German government taking a 'haircut' on the Greek debt it holds is politically risky for Merkel ahead of next year's federal elections when she will seek a third term.

Germans would see such a writedown as a move towards a 'transfer union' whereby richer northern European nations bankroll southern ones they consider indisciplined.

In her interview, Merkel denied suggestions that Germany's election timetable was the reason for ruling out a writedown of Greek debt at this stage, saying that Greece now had an extra two years until 2016 to meet tough fiscal goals.

Private creditors took a big haircut earlier this year. The International Monetary Fund and many economists say euro zone governments will also have to suffer losses before Greece's debt can be brought down to a sustainable level.

Merkel reiterated her view that pushing Greece out of the euro zone - a scenario favored by a eurosceptic minority in her centre-right coalition - would prove far more costly than the bailout program.

"We should avoid all instability," she said.

Germany's lower house of parliament, the Bundestag, approved the latest Greek bailout on Friday despite growing disquiet about the costs of the euro zone crisis to taxpayers.

Merkel did not manage to draw an absolute majority from her own ranks after 23 of her lawmakers rebelled.

(Reporting by Gareth Jones; editing by Jason Webb)

• A Permanent Economic Emergency