PARIS (Reuters) - France and Germany said on Monday banks should ring-fence speculative activities from other business lines rather than be banned from them outright, setting out their position ahead of European Commission proposals aim at limiting risk.

On Wednesday the EU executive will propose a draft law to rein in risks from trading at banks to make it less likely taxpayers will have to bail out lenders if trading bets go wrong.

The draft law is expected to propose an outright ban on speculative trading for the bank's own account - so-called proprietary trading - rather than simply ring-fence such activities as Germany and France suggest.

"We have confirmed our agreement in principle on the separation of speculative banking activities," French Finance Minister Pierre Moscovici said after a meeting of the French and German finance ministers and central bankers in Paris.

Moscovici and his German counterpart Wolfgang Schaeuble both told journalists they wanted the European Commission to take into account laws already in place in the two countries.

The French minister said their laws were already perfectly in harmony with the so-called Liikanen report, which the Commission is using for inspiration and calls for separation of speculative activities into their own division of the bank.

While such an arrangement allows speculative activities to be under the same roof as other parts of the universal bank model, the Commission is believed to want to go further with the proposal to ban speculative or proprietary trading.

Last week Reuters reported that France and Germany also wanted more lenient treatment of non-speculative trading activities at banks as they worry that over strict rules could hamper lenders' ability to funnel financing to the economy.

Moscovici's German counterpart, Wolfgang Schaeuble, said the two countries also aimed to ensure that a new financial transaction tax did not harm the functioning of their markets.

Deeming the tax to be "indispensable", German Economy Minister Sigmar Gabriel, also present at the Paris talks, said: "The balance has to be found between taxation and regulation of financial markets, there is no question of disrupting them."

The financial sector is bracing for the new tax and tougher regulations, which come as the European Central Bank begins poring over their assets to check that their balance sheets are sufficiently solid.

"There is no reason why we should find any dramatic situations given the efforts that have already been made," Bank of France Governor Christian Noyer said.

(Reporting by Leigh Thomas and Huw Jones in London; Editing by Nick Vinocur and Mark John)