* G20, Europe prepare for Greek election shock
* Central banks ready to combat Greek market storm
* Britain to flood system with cash
* Greek leftist says bailout deal will be dead by Monday
* Spain promises new measures after yield hits 7 percent
By Stella Dawson and Jan Strupczewski
WASHINGTON/BRUSSELS, June 15 (Reuters) - Central banks from major economies stand ready to take steps, including coordinated action, to stabilise markets as world economies prepare for a possible financial storm or public panic after cliffhanger elections in Greece this weekend.
Britain announced it would flood its banking system with cash as the euro zone's crisis casts a "black cloud" over the nation's economy.
Officials from the G20 nations, whose leaders are meeting in Mexico next week, said that central banks were ready to take steps to stabilize financial markets - if needed - by providing liquidity and prevent any credit squeeze after Sunday's election.
Canada is "ready to act" if the situation takes a serious turn for the worse or there is "an external shock," Andrew MacDougall, a spokesman for Prime Minister Stephen Harper, said on Thursday.
The Bank of Japan left policy unchanged on Friday following a two-day meeting, keeping its financial firepower in reserve in case it is needed after the Greek election. China and India are both working on contingency plans, officials and sources said last week.
In Europe, authorities also laid plans for tackling turmoil such as if Greeks emptied their bank accounts should the SYRIZA party, which has promised to tear up the country's bailout deal with the EU and the IMF, score a decisive victory on Sunday.
SYRIZA leader Alexis Tsipras said the memorandum deal with Greece's international lenders, which has helped to push the economy into a depression, would not last beyond the weekend.
"The memorandum of bankruptcy will belong to the past on Monday," Tsipras, who has rapidly emerged from fringe politics to challenge the mainstream for power, told his last campaign rally in Athens.
However, French President Francois Hollande warned Greek voters about seeking what Tsipras has promised - a future in the euro while ditching the 130-billion-euro bailout deal sealed earlier this year and its demands for punishing austerity policies.
Hollande said on Greek TV that he wanted the country to stay in the euro, rather than reviving its drachma currency.
"But I have to warn them, because I am a friend of Greece, that if the impression is given that Greece wants to distance itself from its commitments and abandon all prospect of recovery, there will be countries in the euro zone which will prefer to finish with the presence of Greece in the euro zone," he said.
SYRIZA is running neck-and-neck with the mainstream conservatives for Sunday's parliamentary vote, a re-run of an election last month that produced a stalemate in which neither the pro- nor anti-bailout camps were able to form a coalition.
Greek banking stocks soared more than 20 percent on Thursday amid market talk that secret opinion polls were showing that a government favorable to the international bailout agreement was likely to emerge after the June 17 election.
READY FOR THE CASH TO FLOW
G20 officials said that central bankers are ready to ensure enough cash is flowing through the financial system if severe market strains emerge after the elections in Greece, which coincide with votes in Egypt and France.
"The central banks are preparing for coordinated action to provide liquidity," said a senior G20 aide familiar with discussions among international financial diplomats.
Depending on the depth of any turmoil, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday during the Mexican summit of leaders from the G20, which includes major emerging economies such as China.
Britain did not wait for the elections to announce action. Bank of England Governor Mervyn King said the country would launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.
The central bank would also activate an emergency liquidity tool, King said in his annual Mansion House policy speech to London financiers.
King said the euro zone's problems were causing a crisis of confidence in Britain that was leading to a self-reinforcing weaker picture of growth.
"The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead," he said.
In less colourful language, the Bank of Japan also acknowledged the nervousness surrounding Europe's debt crisis.
"The BOJ will do its utmost to ensure the stability of Japan's financial system," it said in a statement after its policy meeting.
Faced with Greek defiance, officials said the euro zone would not tear up the main targets of the bailout no matter who wins the elections, but it might consider giving a new government in Athens some leeway on how it reaches them.
"The headline targets cannot be changed," one senior EU official told Reuters. "There could be some tweaks to the path to get there, but not the goals."
Euro-zone finance ministers are scheduled to hold a teleconference on Sunday evening to discuss the poll outcome.
One euro-zone official said that the main concern, if SYRIZA overwhelmingly won the election, was the risk of large capital outflows from Greece if depositors worry their savings in euros could later be frozen or converted into new drachmas.
"It is not even about a bank run on Monday morning after the elections. People can now log on to Internet banking and make transfers on Sunday evening as well," an official said, explaining the rationale of the ministerial call.
Spain and Italy, under increasing fire in Europe's debt crisis, earlier promised new measures to repair their public finances as their soaring borrowing costs raised new alarm.
But German Chancellor Angela Merkel rebuffed pressure from EU partners and the United States for Europe's most powerful economy to underwrite debt or guarantee bank deposits in the single currency area.
Spain's 10-year bond yield hit a euro lifetime high just a touch above 7 percent on Thursday - a danger level above which Greece, Ireland and Portugal were driven to seek international rescues - despite last weekend's euro-zone agreement to lend Madrid up to 100 billion euros ($125 billion) to recapitalize ailing banks.
"It is not a situation that can be maintained over time ... and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down," Spanish Economy Minister Luis de Guindos told reporters in the corridors of parliament.
Moody's Investor Service slashed Spain's sovereign credit rating by three notches to Baa3, just one level above junk, late on Wednesday, citing the government's "very limited" access to international debt markets and the weakness of the economy.
BOLD NEW MECHANISMS
Visiting Rome, Hollande called for the euro zone to adopt bold new mechanisms to insulate member states and their banks from market turmoil, such as a joint fund to pay down debt, putting him on a collision course with Berlin.
"We need imagination and creativity to find new financial instruments," Hollande told a news conference. "To deepen financial union, there are many options such as a financial transactions tax and joint debt issuance, including euro bonds, euro bills or a debt redemption fund."
However, Merkel rejected "miracle solutions" such as issuing joint euro bonds or creating a Europe-wide deposit guarantee scheme. Such proposals were "counterproductive" and would violate the German constitution, she told parliament.
She warned against overstraining the resources of Europe's biggest economy, saying: "Germany is putting this strength and this power to use for the well-being of people, not just in Germany but also to help European unity and the global economy. But we also know Germany's strength is not infinite."
Italy, rapidly coming into the firing line, saw its three-year borrowing costs shoot up to 5.3 percent at auction on Thursday, the highest since December, despite Germany's strong expression of support for Prime Minister Mario Monti's reforms when he visited Berlin on Wednesday.
Surging Spanish and Italian bond yields reflect investors' concern that the 17-nation currency bloc has failed to arrest its 2-1/2-year-old debt crisis.