(Adds quotes by U.S. Treasury in paragraphs 7 to 9)

By Lesley Wroughton

WASHINGTON, May 8 (Reuters) - The United States insisted on Tuesday that Paul Wolfowitz's ability to lead the World Bank was effective and undamaged, while his European critics said the bank's credibility was at risk as long as he was still at the helm.

The outcome of the transatlantic battle over Wolfowitz's leadership, which has now raged for weeks over a pay and promotion deal for his companion, remained unclear, with the Bush administration maintaining he could be effective.

"We believe that the World Bank can continue to be an effective development institution with Paul Wolfowitz as president," White House spokesman Tony Fratto said.

Questions over the leadership of the former U.S deputy defense secretary grew more heated after leaked findings of a bank panel said he broke rules when he personally directed a promotion for his companion, World Bank Middle East expert Shaha Riza, and her transfer to the State Department in 2005.

Meanwhile, Wolfowitz's lawyer complained it was "terribly unfair" his client was given only three days until the close of business on Wednesday to respond to the panel's findings.

In a statement the lawyer, Bob Bennett, said that under bank rules employees under investigation would be given nothing less than five days to respond to such allegations.

The U.S. Treasury said Wolfowitz deserved a fair process and urged the panel to give him a week to respond.

"That includes sufficient time to review the ad hoc committee's report and respond, as well as sufficient time for the ad hoc committee to consider his response to the report," Treasury spokesperson Brookly McLaughlin told Reuters.

"Anything less than a fair process would reflect poorly on an institution as important and respected as the World Bank, she added.

The seven-member panel refrained from making any recommendations on how Wolfowitz should be penalized for violating bank rules until his response.

There are no rules to determine the dismissal of a World Bank chief because it has never happened before in the bank's nearly 63-year history.

Meanwhile, behind the scenes tensions simmered between the United States, which put Wolfowitz in the job, and some European shareholders, who grudgingly confirmed him for the job in 2005 despite misgivings over his role as an architect of the Iraq war.

'SERIOUS DOUBTS'

Since the bank's inception after World War Two, the United States has always nominated the president without objection, while the head of its sister institution, the International Monetary Fund, has always been a European.

Wolfowitz has blamed the controversy on a smear campaign, mainly by critics among the bank staff and member countries of his ties to the Bush administration and the Iraq war.

European board sources told Reuters on Tuesday that Wolfowitz was unlikely to quit even though the panel's findings further damaged his credibility.

"Many hoped that the situation would resolve itself and Mr. Wolfowitz would step down, but he is not likely to resign," one board source said.

Dutch Finance Minister Wouter Bos, speaking at the end of a gathering of finance ministers in Brussels, acknowledged the finding of the report had increased pressure for a resolution.

"Because of the news of this morning the pressure has increased ... but we don't know the contents of the report. ... It is in the hands of Mr Wolfowitz himself to come up with a reaction," Bos said.

Asked if he thought the current controversy meant that the tradition of the United States always choosing the president of the bank should be changed, Bos said:

"I don't think the problems with Wolfowitz stem from the fact he is American. It may become part of the discussion at some point whether we should breach that rule of thumb of how we appoint presidents to the World Bank or the IMF ...

"All we need is a president with a good reputation, with good integrity and that is what the discussion is about now," Bos said. Asked whether that integrity was present now, he added: "I have serious doubts."

(Additional reporting by Tabassum Zakaria)

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