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* Orban says wants to slash foreign lenders' control of bank sector
* Proposes state-run bank
* Calls on c.bank policymakers to cut rates
* Germany raps Orban, Italian bank says Hungary has become "nightmare"
By Marton Dunai and Krisztina Than
BUDAPEST, March 12 (Reuters) - Hungary's go-it-alone prime minister said on Tuesday that foreign banks controlled far too much of the lending sector and promised to free companies from billions in euro and Swiss-franc loans.
Viktor Orban, a conservative who has angered investors and ignored European Union warnings that he is backsliding on democracy, said his government would set up a system of state-owned banking and called on policymakers to cut rates further.
In a week when the ruling Fidesz party overhauled the constitution and, via his former economy minister, Orban took control of the central bank, the combative prime minister stepped up rhetoric characterising Hungary as a country embattled by foreign influences that are keeping it down.
He said one step would be to help small firms convert euro- and Swiss franc-denominated debt into forint loans, a move that may force losses on banks but one that Orban said was crucial for Hungary to go its own way.
"There is one way to break free: if we break free of foreign currency lending," he told a business forum. "In my mind it is fundamentally a matter of sovereignty."
Orban said the government would boost lending by establishing a state-owned banking system based on the network of savings cooperatives it acquired last year.
He also suggested it would push to slash the 90 percent share of the banking sector owned by foreign lenders, which include units of Belgium's KBC, Italy's Intesa Sanpaolo and UniCredit, and Austria's Erste Bank and Raiffeisen.
"We would like for the Hungarian banking system to be at least 50 percent Hungarian owned," he said.
The push for more state influence in the economy is a departure from neo-liberal policies, such as selling banks and other firms into private hands, that most of the EU's new ex-communist members pursued before joining the bloc last decade.
And as the euro zone crisis has exposed the EU's inability to enforce economic rules among its members, Orban's actions have underscored the paucity of tools the bloc has to uphold its democratic values.
Diplomats and rights groups say the charismatic 49-year-old leader has taken an autocratic tack, eliminating checks and balances and replacing opponents in the judiciary, media authority and central bank with allies who will do his bidding.
Germany used a visit to Berlin by Hungarian President Janos Ader, an ally of Orban, to voice concerns about this week's vote by parliament in Budapest to change the constitution.
"The concerns of Hungary's European partners and friends, for example over the restricting of the constitutional court's competencies, must be taken seriously," a spokesman for German Chancellor Angela Merkel said.
Orban's supporters say the accusations are part of a campaign led by foreign-owned businesses against Fidesz-backed initiatives such as taxes on banks and retailers and energy price cuts that have hit utilities' profits.
Facing Europe's highest banking tax, an earlier scheme to reduce borrowers' foreign currency loan burdens, and higher non performing loans, foreign-owned banks have been some of the hardest hit.
Italian bank Intesa Sanpaolo said its Hungarian unit had lost 279 million euros in the fourth quarter.
"Hungary, as you know, used to be very good for financial services; it has now turned into a sort of nightmare," CEO Enrico Cucchiani told analysts on a conference call.
"Everyone is pretty concerned about Hungary."
The forint dropped almost 1.5 percent on the day to 306.29 per euro.
FRUSTRATION AT HOME
Orban, a father of five who made his name as a student activist under communism, defended his policies on Tuesday and said breaking ties with the International Monetary Fund last year was to prove that Hungary didn't need outside help.
"No matter how many enemies we have, we will find our friends and can stand on our own feet," he said. "The struggle for freedom to act is the most important struggle."
At home, Orban's tactics have driven away many of the voters who elected his Fidesz party with an overwhelming two thirds parliamentary majority in the 2010 election.
Although Fidesz leads opinion polls ahead of an election next year, its popularity is hovering far below its peak at about 25 percent, and about half of voters are undecided.
Aranka Sagi, a 56-year-old former kindergarten worker, illustrated the frustration among many Hungarians who admire Fidesz but question some of its policies.
"Fidesz does its job very well, but they will be under attack. There are many poor people and many unemployed. It has never been this bad in the past 20 years," she said.
"I don't think that the multinational companies should be blamed. The decisions are up to the Hungarians."
Orban has launched a new campaign attacking his leftist rivals and is now expected to embark on a series of pro-growth measures, including urging the central bank to cut interest rates.
He has said last week's naming of Gyorgy Matolcsy - a close ally and the architect of economic policies that have spurned outside help and led to criticism from investors - to head the central bank would not infringe on its independence.
But he called on the bank to cut interest rates so companies can borrow at a lower rate than the typical 8-10 percent today.
Analysts said that and the push to reduce foreign currency loans were a clear signal that rates would come down, and the government was trying to push the forint currency weaker, which could make exports more competitive and boost growth.
"The message is clear: they want a weaker forint," said Daniel Bebesy from Budapest Fund Management. "The risk is that the gains we have from boosting exports will be less than the higher cost of financing our foreign currency debt."