By David Lawder

WASHINGTON (Reuters) - A global finance industry group on Wednesday urged regulators to withdraw plans for a capital surcharge on the world's largest banks, saying it would put economic recovery at risk.

The Institute of International Finance said a forced recapitalization of European banks was not necessary and that policymakers need to balance the needs of growth with those of safety and soundness in the banking system.

"We cannot visualize a strong global recovery as long as we continue to have deleveraging in the household sector and the corporate sector in the United States, Europe and the UK," he said.

Dallara said global regulators should proceed with higher general capital requirements under the Basel III agreement, but said capital surcharge plans for about 28 so-called global systemically important banks were "misguided."

The IIF, which represents the world's largest banks, brokerages and insurers, joins a growing effort among financial sector executives to lobby against the surcharges, which would start in January 2016 and be fully implemented by the end of 2018. They would come on top of the minimum 7 percent capital increase required by Basel III.

Earlier this week, Jamie Dimon, chief executive of JPMorgan Chase & Co <JPM.N>, called the surcharges "anti-American."

The noise is increasing because the Basel Committee is due to meet at the end of this month to finalize surcharge rules for G20 finance ministers to approve in October, with final endorsement by G20 leaders at a summit in November.

There are also pushback attempts on the Basel III liquidity rules, to include corporate bonds in liquidity buffers and not just predominantly sovereign debt, as currently agreed.

Tran said current stock valuations indicate that markets anticipate a total write-off of all sovereign debt holdings by the banks, an assumption he called "unreasonable."

"Even if the borrower were to default, there is always a 30 to 40 percent recovery value in the securities," Tran said.

Dallara added that European banks would be able to raise needed capital on their own if policymakers were to stabilize the financial environment with more credible policies. He said they should articulate a plan for more fiscal integration in the euro area to allow members to draw on the bloc's strengths and provide a fiscal compliment to the European Central Bank.

He said the form this would take was far from certain, but "would involve to some degree a new institutional fiscal authority."

NEW G8 OR G9 NEEDED?

The IIF also called on finance ministers and central bank governors of the world's biggest economies to create a simpler, more transparent framework for economic policy.

It suggested a smaller group of the G20 economies -- a new G8 or G9 with key emerging economies such as China, India and Brazil -- hash out critical initiatives on currencies, imbalances and regulatory coordination for review and endorsement by the broader G20.

At the moment, there is still not enough policy coordination, Dallara said. "Countries have been formulating policy as if they were in their own world .. (with) a denial of interdependence," he said, noting unilateral exchange rate actions and trade policies.

Regarding a proposed private sector swap of Greek bonds led by the IIF, Dallara reiterated recent statements that he was optimistic it would ultimately be implemented.

The proposal aims to ease Greece's debt burden by swapping sovereign bonds with 15- or 30-year maturities for new 10-year securities that carry additional guarantees. IIF officials said the plan would dramatically lower Greece's interest costs and debt-to-GDP ratio when it is implemented.

(Reporting by David Lawder; Editing by Chizu Nomiyama and Dan Grebler)