BERLIN (Reuters) - Britain's decision to leave the European Union may have a knock-on effect for the rest of the EU and long-term uncertainty over Brexit poses a threat to the entire region's economy, German Finance Minister Wolfgang Schaeuble said on Wednesday.

The EU's leaders held their first meeting without Britain on Wednesday, as they face years of uncertainty while they negotiate the British withdrawal after last week's vote.

Asked about the danger of a domino effect, Schaeuble said, "it is certainly not to be dismissed". He added that Britain did not have unlimited time to decide on its application to leave.

"It would be fair if they were to decide in the foreseeable future," he said. Under the EU's Lisbon Treaty, a country that wants to quit the EU must invoke Article 50 of the treaty, after which it has two years to work out the terms of its departure.

"Of course, we will do everything we can to make sure the damage from this decision does not get even greater," Schaeuble said. So far, he said, efforts to avoid chaotic reactions on financial markets had succeeded.

He said he was sticking to his view that "in is in and out is out" regarding Brexit.

Schaeuble also said the EU can improve if it comes up with fewer rules and manages itself more efficiently. He reiterated his view that the European Commission should apply rules set out in treaties.

Earlier, the German newspaper Handelsblatt reported that Schaeuble aides had drawn up a post-Brexit reform plan for the EU, including stricter budget rules and a downsized European Commission.

(Reporting by Gernot Heller; Writing by Madeline Chambers; Editing by Paul Carrel, Larry King)