UPDATE 3-Merkel defends cautious reponse to recession

(Updates Merkel re-elected as party leader, paragraphs 9-11)

By Erik Kirschbaum

STUTTGART, Germany, Dec 1 (Reuters) - Germany will stay out of a "senseless" international competition to spend billions of euros to boost flagging economic growth, Chancellor Angela Merkel said on Monday.

Despite heavy criticism from across Europe and even within her own conservatives for her cautious response to the global economic crisis, Merkel said she would not open any spending taps even though Germany faces its worst post-war recession.

In a speech at a party congress of her Christian Democrats (CDU) ahead of a general election next September, Merkel said Germany would closely monitor the economic situation and be ready to act fast if necessary.

"We will not take part in a competition to outdo one another with an endless list of new proposals, in a senseless contest over billions," she said, a barb seemingly directed at French President Nicolas Sarkozy and his European Union presidency.

"That's not going to happen with us (CDU) and that's certainly not going to happen with me."

Sarkozy had criticised Merkel's reaction last week to EU plans, saying: "While France is working, Germany is thinking."

With its solid fiscal position and its heavy reliance on exports, Germany has faced urgent calls from partners to do far more to stimulate growth and help restore economic confidence.

Merkel turned a deaf ear to that again on Monday. She spoke instead of Germany remaining committed to achieving a balanced federal budget within the next four years, and said its "social market economy" should serve as a model for other countries.

But the criticism kept coming even though Merkel, 54, was later re-elected by the party congress to a fourth two-year term as CDU leader with 94.8 percent of the vote.

"We need tax cuts now, and not 'at some point in the future'," said Christian Baldauf, head of the CDU in Rhineland-Palatinate state, in speech to delegates. "Lower taxes now would be exactly what is needed. Our taxes are too high."

Friedrich Merz, a CDU financial policy expert and Merkel rival, drew loud applause for his speech calling for tax relief in January, while Josef Schlarmann, head of the CDU's small business association, told reporters cuts were needed now.

MERKEL SAYS NO QUICK ACTION

Merkel, who has managed to remain popular in opinion polls despite doubts about her response to the first real crisis she has faced since taking power in 2005, told 1,000 party delegates there would be no tax cuts before the federal election.

"What we will not do is introduce any immediate measures to stimulate the economy for a limited period of time," she said, in an apparent swipe at British Prime Minister Gordon Brown's plan to temporarily cut value-added tax.

Many economists have said it makes little sense to rule out tax cuts now, as the crisis unfolds, yet promise them later on.

Merkel has faced withering attacks in the past week for her stance, even from some of her most loyal backers.

Werner Schnappauf, managing director of the BDI industry association, and Hanns-Eberhardt Schleyer, head of ZDH, the skilled workers' lobby, appealed to Merkel to change course.

There was further bleak economic news on Monday when the German plant and equipment makers' association VDMA said engineering orders fell 16 percent in October on the year.

Germany's car industry, including Stuttgart-based Porsche AG and Daimler , are struggling. Daimler wants to cut the work week to below 30 hours from January while Porsche plans to shut its factories for seven days next month.

Last week, Finance Minister Peer Steinbrueck said the economy could contract by as much as 1 percent in 2009, which would be the deepest recession since modern Germany was founded in 1949 from the rubble of World War Two. (Editing by Dave Graham and Charles Dick)