* Protests seen as too limited to sway governments
* Portugal to be grilled by EU ministers on deficit

By Jan Strupczewski and Inmaculada Sanz

BRUSSELS/MADRID, Sept 29 (Reuters) - The European Commission
proposed steep compulsory deposits and fines on Wednesday for
euro zone countries that breach EU budget rules, as trade unions
staged strikes and protests against austerity measures.

In a sign of the new "get tough" policy on fiscal deficits,
euro zone sources said finance ministers of the single currency
area would grill Portugal on its 2011 budget plans on Thursday
and press for more radical measures to address market concerns.

Spain's first general strike for eight years disrupted
public transport and some factories but seemed unlikely to make
Socialist Prime Minister Jose Luis Rodriguez Zapatero back down
on wage cuts, spending curbs, pension and labour market reforms.

The European Trade Union Confederation said at least 100,000
joined a pan-European anti-austerity march in Brussels. Police
put the crowd at 56,000 and said 218 people were detained for
minor offences. Up to 5,000 demonstrators marched in Warsaw but
other rallies appeared smaller.

Analysts said the protests were too small and disparate to
sway debt-laden governments from cutting public deficits.

Under pressure from investors who fear another Greek-style
meltdown, Ireland was preparing to announce a massive bill for
rescuing stricken Anglo Irish Bank, while government and
opposition leaders in Portugal wrangled over spending cuts or
tax hikes to narrow that country's yawning deficit.

European Commission President Jose Manuel Barroso said the
political impasse in his native Portugal was serious and the
government had to stick to its fiscal targets.

"Portugal has to show responsibility," he said, adding that
markets believed the government was "shilly-shallying".

TEETH

The European Union executive outlined plans to prevent any
repetition of Greece's debt crisis by making repeat deficit
offenders deposit 0.2 percent of their gross domestic product
with Brussels.

The interest-bearing deposit would be converted into a fine
unless the country in breach took effective action to cut the
budget gap below EU limits.

If a country repeatedly ignored recommendations to rectify
severe economic imbalances in wage, macroeconomic and fiscal
policy, it would incur a yearly fine of 0.1 percent of GDP until
EU finance ministers decided corrective action had been taken.

"(For) the euro area, changes will give teeth to enforcement
mechanism and limit discretion in the application of sanctions,"
the Commission said. "Sanctions will be the normal consequence
... for countries in breach of their commitments."

The proposals require approval by EU governments and the
European Parliament, with Germany and France apparently still at
odds about how automatic the application of penalties should be
and whether politicians should retain the final say.

Euro zone markets steadied on Wednesday with the risk
premium on Irish and Portuguese government bonds over benchmark
German Bunds off Tuesday's peaks, although the cost of insuring
Portuguese debt against default hit a new high.

Banks took far less three-month liquidity than expected from
the European Central Bank, soothing some market fears, but the
ECB said in a report the EU banking sector remains vulnerable
and its recovery from the financial crisis has been uneven.

RETHINK

The new EU budget rules, demanded by chief paymaster Germany
as the price for bailing out Greece and providing a wider safety
net for the euro zone in May, aim to prevent any state fiddling
its statistics and running up unsustainable deficits in future.

However, some economists argue that stiffer penalties for
deficit sinners will not solve the euro zone's problems since
harsher austerity may choke economic growth in those countries
and increase unemployment, further straining public finances.

"Unless there is a rethink, the euro zone risks permanent
crisis, with chronically weak economic growth across the region
as a whole and politically destabilising deflation in the
struggling member states," Simon Tilford, chief economist of the
Centre for European Reform, said in an essay.

France, determined to cling to its AAA credit rating which
enables it to service its debt at low market rates, announced a
2011 budget designed to reduce the deficit to 6 percent of GDP
from an expected 7.7 percent this year.

Economists said most savings would come from the automatic
expiry of economic stimulus measures and a reduction in tax
breaks rather than any serious cut in high public spending.

EU policymakers voiced support for Ireland's efforts to
surmount a huge financial crunch following the crumbling of its
banking sector after a real estate bubble burst, but they urged
Dublin to move swiftly to reassure markets with decisive steps.

"Ireland knows what it needs to do, starting with an
ambitious fiscal restructuring plan with concrete measures, in
order to reach the targets it has set," Lorenzo Bini Smaghi of
the ECB's executive board said. "They have to do it quickly."

Prime Minister Brian Cowen is set to reveal the final cost
of winding down Anglo Irish after markets close on Thursday,
expected to propel government debt to over 100 percent of GDP.

The Irish Times reported the bill could rise above 30
billion euros ($40.4 billion) under a worst case scenario but
would not be as high as the 35 billion euros cited by credit
rating agency Standard & Poor's.

However, markets are concerned that Dublin is not planning
to outline more than 3 billion euros in cuts in its 2011 budget
until December, leaving long weeks of uncertainty.

In Portugal, conservative opposition leaders said after
meetings with President Annibal Cavaco Silva they were prepared
to help the minority Socialist government pass a deficit-cutting
budget provided it reduced spending rather than raising taxes.

Newspapers said the government wanted to push through tax
rises to meet this year's deficit target and prepare next year's
budget. Analysts say a rise in VAT sales tax is likely.

(additional reporting by Axel Bugge in Lisbon, Carmel
Crimmins in Dublin, Vicky Buffery and Emile Picy in Paris;
writing by Paul Taylor; editing by Mike Peacock, Ron Askew)