* Rajoy seeking direct bank aid without adjustment programme
* EU paymaster Germany opposes, wants external supervision
* Analysts see Rajoy preparing Spaniards for bailout
MADRID, June 4 (Reuters) - Prime Minister Mariano Rajoy is pressing for a direct European rescue for Spain's banks with moral support from the European Commission, but Germany appeared to rule out such a "bailout lite" for the euro zone's fourth biggest member.
A source with knowledge of the matter said Madrid is working along with European institutions to find a way to directly refinance banks using rescue funds without the government having to come under a full EU/IMF adjustment programme.
"Right now the most urgent issue is the banks, and there are negotiations to refinance the banks directly without it being an intervention. It's a mechanism for all (European) banks, not just for Spanish banks," the source said.
Spain's borrowing costs have jumped in recent weeks, largely due to doubts over whether the government can raise enough funds for the rising bill to strengthen its banks, left with big holes after the 2008 crash of the housing and construction market.
Under current rules Spain can get a loan from the European rescue fund, or EFSF, but it would come with tough conditions and intrusive supervision, with a high political cost for Rajoy. The new permanent European rescue fund, the European Stability Mechanism (ESM), due to enter into force in July, can lend to banks but the request still has to be made by the state.
The source with knowledge of the matter said Spain believed the European Union's executive could take a plan for bank aid to a summit of the bloc's leaders on June 28-29.
EU Economic and Monetary Affairs Commissioner Olli Rehn said Brussels was considering direct bank recapitalisation by the ESM to break the link between weak sovereigns and ailing banks, but it was not possible under the treaty currently being ratified by member states.
"This is not part of the ESM treaty for the moment, in its present form, but we see that it is important to consider this alternative of direct bank recapitalisation as we are now moving on in the discussion on the possible ways and means to create a banking union," Rehn said.
Germany, the main contributor to the bailout fund, opposes changing the ESM treaty to allow direct bank recapitalisation and has veto power. Berlin contends that only a formal programme approved by national parliaments permits proper international supervision of how aid funds are spent.
"It is only for a national government to decide whether it draws on the rescue mechanism and the requirements that are linked to it. That of course is also true for Spain," government spokesman Steffen Seibert told a news conference when asked about media reports that Berlin was pushing Madrid to apply.
Seibert also said Spain first needed to figure out how much money it needs to recapitalise its banks.
After pressing in vain for the European Central Bank to ride to Spain's rescue by buying government bonds, Rajoy took a different line on Saturday, calling in a speech for a euro zonefiscal authority with powers to manage member states' budget policies, to show markets the euro project is irreversible.
Some analysts saw the call as a way of preparing Spaniards for the need for a European rescue for their country. Others saw it as a goodwill gesture towards the Germans.
Gary Jenkins, director at Swordfish Research, said the fact Rajoy was pushing for greater transfers of fiscal sovereignty was a sign of how urgent the situation was in Spain.
"Spain is heading towards requiring significant intervention in order to avoid a disaster scenario," he wrote.
SPAIN MEETS CRITERIA FOR AID
Spain already complies with the terms for the state to tap the temporary European Financial Stability Facility (EFSF) under its "guidelines on recapitalisation of financial institutions".
Those conditions are: it needs the money as a last resort to recapitalise systemic lenders, such as Bankia, and it has also started an independent audit of its banks in two stages.
The ECB and key EU partners such as Berlin are keen to avoid a repeat of last year's events when they had to push Portugal to seek aid after former Prime Minister Jose Socrates resisted for months owing to the stigma attached to an "IMF bailout".
The ECB stopped buying Portuguese bonds in the secondary market and Portuguese banks took the unprecedented step of warning the government that they too might stop buying its debt -- a move that probably tipped Socrates into seeking help.
The head of Portugal's banking association, Antonio de Sousa, told Reuters in an interview at the time that the ECB had told the country's banks to cut exposure to government debt.
German Finance Minister Wolfgang Schaeuble insisted then that aid could only be granted in the framework of a reform programme, the same stance Berlin is now taking towards Madrid.
Spain rescued its fourth biggest bank, Bankia, in May, in a bailout that will cost some 23.5 billion euros, much higher than anticipated, raising doubts over whether other Spanish banks have yet to recognise bigger losses.
Independent auditors contracted by the government are due to report in mid-June on the state of the banks, and a detailed International Monetary Fund report on the financial system is due on June 11.
Both studies should shed light on the scale of the final bill for plugging the holes in the banks, which have some 184 billion euros in exposure to repossessed property and sour loans to real estate developers.
The government and the biggest banks hope the reports will show Bankia was an exception, that most of the banking system is solvent and that the rest has been addressed by regulations that have forced lenders to recognise more than 80 billion euros in losses.
Still, after confusion over how Bankia's rescue would work damaged Madrid's market credibility, it's hard to imagine a bank rescue figure that will automatically restore confidence.
"What is not clear is whether it will be enough to recover the market confidence, that is not going to make things worse," said a senior Spanish banker, regarding the audits.
Spain has said it will borrow money on the markets to recapitalise Bankia.
Even with 10-year bond yields at 6.5 percent, the government says it does not face trouble tapping the markets because its average borrowing costs are lower, at 4.07 percent, and only 2 percent of public expenditures go to service debt.
Political risk consultancy Eurasia Group said Europe would do its best to ease the pain for Rajoy, who has spread much of the blame for mismanaging the banking sector on his Socialist predecessors and the outgoing Bank of Spain governor.
"At this stage, EU political and policy elites are open to design a programme that would emphasize banks and would be light on conditionality to facilitate Rajoy's ability to manage internal constraints," it said in a report.
But Eurasia Group said Rajoy would delay as long as possible to avoid the stigma that could affect his party in subsequent elections and because it will look as if his austerity programme and economic reforms had merely set the country up for a banking bailout instead of putting it back on track.
One high-level government source argued that there is little motivation for Rajoy to take some 70 billion euros in aid for the banks if there are no guarantees it will actually bring down borrowing costs.