Hungary central bank seeks to force banks into forint government debt

* Will convert 2-week bills into 2-week deposits from Aug

* Foreign banks will not have access to 2-week deposits

* Aims to encourage banks to buy more government securities

* Up to 1,000 bln forints could leave central bank deposits

* Forint weakens on announcement, bond yields fall (Adds more comments, markets)

By Krisztina Than and Gergely Szakacs

BUDAPEST, April 24 (Reuters) - Hungary's central bank moved on Thursday to push commercial banks to buy more local-currency government debt in an attempt to reduce the country's high reliance on foreign financing.

The move fits into the strategy of Prime Minister Viktor Orban, re-elected in a landslide earlier this month, to project himself as a champion of financial sovereignty.

Since winning power in 2010, Orban has weaned Hungary off an International Monetary Fund lifeline, spurned European Union strictures on constitutional change and made plain his distrust of the foreign-owned banks that dominate the sector.

The central bank's announcement on Thursday is the latest intervention by Hungarian authorities into the local banking system. The government has already instituted Europe's highest bank levy and imposed a tax on financial transactions. The central bank recently proposed a shake-up of the sector.

It said on Thursday that from Aug. 1 its two-week bills - its main tool for managing market liquidity - will be replaced with two-week deposits, where foreign players will not be able to park their funds, and which it won't accept as collateral against loans.

This, the bank said, should encourage foreign banks and banks operating in Hungary to shift some 600 billion to 1 trillion forints ($4.5 billion) worth of funds from the two-week deposits into other assets, chiefly forint-denominated government debt.

The central bank is led by a strong ally of Orban, his former economy minister Gyorgy Matolcsy, who has already crafted a series of go-it-alone policies that often surprised investors.

The government debt agency's deputy CEO told Reuters that new floating-rate bonds first offered at an auction on Thursday should be attractive to banks, and the agency does not expect a significant change in amounts offered at its regular fixed-rate bond auctions.

He also said Hungary may be able to replace the remaining 1.3 billion euros worth of foreign currency debt issuance planned for this year with forint financing, but a decision will only be made in the second half of the year.

"If there are changes in forint financing, we would like to shift issuance towards longer maturities," Laszlo Borbely said.

FORINT WEAKENS, YIELDS DROP

The move could reduce the costs of the central bank, which pays 2.6 percent interest rate on the 2-week bills where banks park funds worth a disproportionately high 5.3 trillion forints.

The forint eased about a quarter of a percent against the euro after the central bank's announcements to 308.50 and dealers did not rule out further weakening beyond 310.

Government bond yields, however, dropped about 20 basis points, and analysts said yields could fall further, depending on how foreign banks react: whether they invest the money into short-term bills or longer-term debt, or take it abroad.

"Market effects should be negative for the forint in the shorter run, due to the implied capital outflow," said Gergely Gabler, an economist at Erste Bank.

David Nemeth at K&H Bank said foreign investment banks will need to decide quickly what to do with their money parked in 2-week bills now they will be shut out from the 2-week deposits.

"Local commercial banks are already buyers of government debt, this will continue ... I don't think their behaviour would change now all of a sudden," he added.

The bank said it will also launch three new tools from June 16 to encourage invetsors to buy government debt. It will introduce a forint interest rate swap facility to allow banks to cut their risks on long-term forint bonds.

There will also be a new asset swap to give banks access to foreign exchange liquidity in exchange for long-term forint government securities, and a new forint liquidity tool.

"What we have done is that we have reduced the appeal of this (two-week bill) instrument significantly and encouraged banks ... to invest the funds into other assets," central bank director Marton Nagy told a news conference. ($1 = 222.71 Hungarian Forints) (Additional reporting by Sandor Peto; Editing by Jeremy Gaunt/Ruth Pitchford)