By Stephen Brown and Erik Kirschbaum
BERLIN (Reuters) - Former German finance minister Peer Steinbrueck will lead the Social Democrats into the 2013 federal election against Angela Merkel, in what will be a polarized campaign because of his tough talk on banks and aversion to forming a coalition with her.
The combative Steinbrueck wants to impose new restrictions on the financial sector and rules out serving in another "grand coalition" cabinet under the conservative chancellor.
Sources in the centre-left SPD, which had been refusing to name its candidate until early next year, said party chairman Sigmar Gabriel would speak with other SPD leaders later in the day about nominating 65-year-old Steinbrueck.
Known for his quick wit and abrasive style, he led Germany's response to the banking crisis as minister in Merkel's previous "grand coalition" government with the SPD from 2005-2009.
The path was cleared for Steinbrueck's candidacy after two other SPD contenders, Gabriel and former foreign minister Frank-Walker Steinmeier, stepped aside.
Steinbrueck is likely to mount much sharper attacks on Merkel than the more diplomatic Steinmeier and could also siphon away votes from her Christian Democrats (CDU) because of his centrist economic views and reputation as a safe pair of hands.
"Steinbrueck is definitely the most dangerous candidate because he appeals to the voters in the middle," said political scientist Gero Neugebauer at Berlin's Free University.
But a poll by Politbarometer released on Friday showed much higher personal support for Merkel. The 58-year-old chancellor, whose reputation has been much enhanced by the euro crisis, had a 53 percent approval rating versus Steinbrueck's 36 percent.
A Hamburg native and former premier of Germany's most populous state, North Rhine-Westphalia, Steinbrueck has never won an election for a major post. Steinmeier was the 2009 candidate against Merkel and suffered a crushing defeat in which the SPD scored a post-war record low of 23 percent.
The outspoken Steinbrueck has vowed that he will never again serve in a Merkel cabinet - a strong signal that he will resist a revival of the coalition between her conservatives and the SPD, whose popularity suffered as the junior partner.
Merkel's spokesman Steffen Seibert said the chancellor has "no preference for who runs against her" in the 2013 campaign.
NO MORE BANKING EXCESSES
Steinbrueck's launch this week of proposals for tough new restrictions on the banking sector have mollified some critics on the left wing of the SPD, who mistrusted him for his centrist economic policy ideas.
The SPD, Germany's oldest party which celebrates its 150th anniversary next year, stands at around 26 percent in opinion polls compared with 38 percent for Merkel's conservatives.
But the poor standing of Merkel's centre-right partners, the Free Democrats who are languishing at 4 percent, may force her back into an alliance with the SPD to secure a third term in office.
The SPD insists its campaign goal is to lead the next government in coalition with its close allies, the Greens. Together the SPD and Greens score about 43 percent in polls.
Steinbrueck hopes to tap into public anger at banks' perceived recklessness and culpability for the financial crisis.
"This is not about destroying the financial system, rather it is about stabilizing it and preventing future excesses, and preventing any repeat of what we have seen in the last years," Steinbrueck said on presenting his banking plan this week.
If Steinbrueck wins office he would seek a special bailout fund for banks, financed by banks themselves so that taxpayers no longer have to rescue the financial sector and the euro zone's bailout mechanism can focus on aiding struggling states.
In proposals criticized by Deutsche Bank, he also wants to separate banks' retail and investment operations in order to safeguard depositors' money.
The pro-euro SPD has supported Merkel's response to the euro zone crisis but Steinbrueck favors even deeper integration with Europe such as common debt issuance in the currency bloc. This is firmly opposed by Merkel and unpopular with many Germans.
Steinbrueck, who has the backing of former SPD chancellors Helmut Schmidt and Gerhard Schroeder, is a straight shooter who angered the Swiss when he was minister by comparing them with Indians running for cover in the face of the financial cavalry.
An avid chess player, Steinbrueck once said of his style on the board: "I often play very impulsively."
(Additional reporting by Andreas Rinke, Gareth Jones and Michelle Martin; Writing by Stephen Brown; Editing by Noah Barkin and David Stamp)