By Karolina Slowikowska

WARSAW (Reuters) - Party allies of Polish Prime Minister Donald Tusk are trying to water down a hotly-contested plan to transfer a chunk of assets from private pension funds to the state, sources involved in the discussions told Reuters.

The planned reform would allow the government to offset public debt and give it more scope to borrow and spend, helping to pull the economy out of a downturn in time for a series of elections starting next year.

But the plan - described by its critics as a de facto nationalization - has alarmed some in Tusk's party who say it could damage business confidence and push away some of the party's own voters who are attached to free market ideas.

Two sources said lawmakers in Tusk's Civic Platform party had held a closed-door meeting last week at which they asked for elements of the plan to be diluted but had met resistance from the finance ministry, which masterminded the plan.

"We know that this (plan) is highly unpopular with our electorate. We need to address this," said a senior Civic Platform legislator who spoke on condition of anonymity.

"The government is up against a wall and we need to pass this reform. But we can try to soften it a bit."

The Finance Ministry said in response to e-mailed questions from Reuters that the direction of the changes in the pension system had already been set out in the document approved by the government.

Government lawmakers who spoke to Reuters said there was broad support for the government's plan in the party, but said changes to it were still possible.

Under Poland's pension system, mandatory pension contributions go into a state vehicle known as ZUS and also into private pension funds, collectively known as OFE.

Under the plan unveiled last month, Polish treasury bonds held by the funds would be transferred to the state and cancelled. Also, the part of a saver's pension pot which is in OFE will be gradually moved to ZUS starting 10 years before they reach retirement age.

RIVAL PROPOSALS

The lawmaker and a second source who is familiar with the discussions inside the government and the party said there was pressure to start moving individuals' pension pots into ZUS closer to the point at which they retire.

This would leave more assets in the private funds, a scenario that would be welcomed in financial markets which worry that if they become too depleted the funds will no longer be active players on the Warsaw stock exchange.

"It was suggested by party members that maybe five years (before retirement) would be enough but the finance ministry said no way," the member of parliament said.

The second source, who also spoke on condition of anonymity, said transferring the assets seven or eight years before the retirement age had been proposed but the finance ministry was highly skeptical.

"We are looking at a watering down of the gradual transfer," said the second source.

Changing the plan along those lines would be complicated.

It would mean fewer assets going to ZUS, forcing the government to find more money from its budget to ensure current pensions are financed. Not having to spend this money on ZUS was a major attraction of the original plan because the government needs to find ways of reducing its budget deficit.

The Finance Ministry said the ministry "does not envisage" a reduction in the 10-year period.

Katarzyna Skowronska, a Civic Platform legislator and deputy head of parliament's public finance committee, told Reuters the government's plan - including the 10-year time frame - was positive because it gave security to future pensioners.

But she added: "There is room for discussion and possible changes in the course of later proceedings."

(Additional reporting by Pawel Sobczak; Editing by Gareth Jones/Ruth Pitchford)