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* Cameron must battle Britain's 'welfare addiction' - Fox
* Says Britain needs tax cuts, spending freeze for growth
LONDON, March 11 (Reuters) - Britain should freeze spending and cut taxes, a senior lawmaker in Prime Minister David Cameron's party said on Monday, deepening divides within the coalition government just days before a budget.
Former defence minister Liam Fox called on the government to battle Britain's "welfare addiction", countering calls from coalition partner Vince Cable to try spending more on infrastructure to revive a floundering economy.
Economic stagnation is thwarting Cameron's efforts to cut the national debt, which rose to 1.2 trillion pounds ($1.8 trillion) last year, or 75 percent of economic output.
Increasing the pressure on Cameron from within his own party just before finance minister George Osborne's March 20 budget, Fox said the debt burden risked becoming a long-term threat to national security.
"We don't have this debt mountain because we tax too little but because we have spent - and continue to spend - too much," Fox said in a speech in central London.
"What we thought was prosperity turned out to be a debt-fuelled illusion," said Fox, who ran against Cameron in 2005 for the leadership of the Conservative Party.
Osborne and Cameron, who pledged in the 2010 election to nurse Britain's economy back to health after the crisis, face an increasingly jittery party whose members fear their bet on growth may fail to pay off before a 2015 election.
Business minister Cable, a senior Liberal Democrat coalition partner of Cameron, has moved closer to the opposition Labour Party's stance by suggesting more government borrowing to finance infrastructure projects might not upset markets.
Moody's downgraded Britain's sovereign credit rating last month saying the economy faced years more sluggish growth and that debt would continue to rise until 2016.
Invoking former Prime Minister Margaret Thatcher, Fox said the government should exempt those under 30 years of age from paying tax on property purchases, cut taxes on bank savings interest and reduce capital gains tax to zero for up to five years.
Tax cuts could be balanced with a spending freeze for at least three years, Fox said. He questioned Cameron's policy of defending some spending - such as health - from spending cuts and called for a dismantling of the universal benefits system.
"This is no short, cyclical correction but a longer term structural correction made necessary by both global economic forces and our own history of massive overspending," Fox said.