*Summit expanded to 90 pct of world economy

*May include sensitive currency debate

*Hopes of breakthrough on climate change

By Stephen Brown

L'AQUILA, Italy, July 2 (Reuters) - G8 leaders will discuss next week when trillions of dollars in support to global economies could safely be withdrawn from recession-hit financial systems, and a proposal to undercut the dollar's dominance.

Italy's Prime Minister Silvio Berlusconi has moved the G8 summit to a medieval town flattened by earthquake, a grim metaphor for the task leaders face on the economy, and says it will be a meeting of "sobriety and solidarity" with a focus on the developing world.

He says "90 percent of the world economy" is represented by the 40 nations and world bodies attending and hopes the summit will exude confidence that the worst of the crisis is over.

But diplomats caution that the July 8-10 meeting, sandwiched between G20 summits in London and Pittsburgh dealing exclusively with the global financial crisis, will not produce "fireworks".

The summit will kick off with talks about whether the crisis is ending, if stimulus packages have worked and if time is ripe to discuss "exit strategies" -- withdrawing the trillions of dollars in stimulus packages that have propped up the global economy in deep recession.

It will also study the future governance of the world economy, with Berlusconi calling it "a G8 of rules".

"But don't expect Berlusconi to come out with a code for global business conduct in L'Aquila, and don't expect (German leader Angela) Merkel to come out with a charter for growth at Pittsburgh either," warned one G8 diplomat.

On the second day, when the G8 (the United States, Japan, Germany, France, Britain, Italy, Canada and Russia) are joined by emerging powers like China and India for "G14" talks, China favours including a sensitive world currency debate [ID:nPEK137542].

G8 sources told Reuters China wanted to debate a new global reserve currency, saying the dollar's ubiquity had worsened the crisis. This is sensitive for markets as perhaps 70 percent of China's $1.95 trillion in official reserves are in dollars.

"This financial crisis has fully exposed some shortcomings in the international currency system," said the deputy Chinese foreign minister, He Yafei, while playing down talk that China had insisted on the debate being on the table in L'Aquila.

LEADERS IN BARRACKS

Summit leaders will stay in barracks in the mountain town of L'Aquila, hit by an earthquake in April which killed 300 people. Despite the note of austerity, earthquake survivors hope the summit will bring aid to rebuild their homes from the rubble.

"Our economy in L'Aquila is at a standstill. We live in the tents, eat in the tents and have no money to spend," said Maria Di Paola in the village of Onna, wiped out by the quake. "We hope the G8 will bring in cash."

Amid debate about whether the G8 is suitable for tackling global challenges or is an increasingly irrelevant rich nations' club, Chancellor Angela Merkel said L'Aquila would "make clear that the existing forum needs to be expanded" [ID:nBEB002425].

Other members, such as Japan and Canada, like its compact format while current chair Italy favours a "flexible format" G8 with more formal ties to the major emerging powers [ID:nLU93667].

The G8 cannot impose sanctions like the United Nations so debate on Iran's post-election violence and nuclear programme will be limited to a message demanding respect for human rights.

CLIMATE CHANGE

Where progress may be most tangible is on a new global pact on climate change to be signed in Copenhagen in December, and on poverty and food security where new commitments could be made.

U.S. President Barack Obama, attending his first G8 summit, will lead a meeting of the Major Economies Forum (MEF) -- which account for about 75 percent of the world's emissions -- and comes armed with progress in Congress on his own emissions bill.

This improves the chances of a pact limiting global warming to no more than 2 degrees Celsius, with U.S. and EU positions now looking closer and reluctant developing-world countries seeing their demands met that rich nations lead the way by cutting their own emissions sharply by 2020 [ID:nN01499710].

Merkel called Obama's moves a "watershed" [ID:nL232845] while a draft document prepared for the G8 summit suggested a goal of reducing global emissions by 50 percent by 2050 [ID:nLP583909].

With nine African countries joining the third and final day of the summit, including current African Union chairman Muammar Gaddafi of Libya, the G8 may have to explain why it is behind on its own 2005 pledge to more than double aid to Africa by 2010.

U.N. chief Ban Ki-moon urged the G8 in a pre-summit letter to "cross the Rubicon" in the fight against poverty [ID:nLB198537]. But host Italy has a poor record on aid pledges and campaigner Bob Geldof says its G8 presidency has a "credibility problem".

But the summit could produce fresh funding for food security programmes, with one G8 diplomat saying Obama could pledge $3-4 billion over three years to be matched by other donor countries.

Italy also hopes the anti-globalisation protesters who clashed so violently with police in its last G8 summit in Genoa in 2001, and besieged London's G20 summit in April, will avoid causing more disturbance to L'Aquila.

"We wanted the most powerful people in the world to stay very close to people who are suffering," said Guido Bertolaso, the head of Italy's Civil Protection agency which is organising both the summit and the reconstruction of the city. For a FACTBOX on the summit's agenda click on [ID:nLU637990] For a FACTBOX on the themes to be discussed [ID:nL228859] (Additional reporting by Reuters bureaux around the world; Writing by Stephen Brown; Editing by Dominic Evans)

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