By Ben Blanchard and Andreas Rinke

BEIJING (Reuters) - China's leader told Chancellor Angela Merkel on Monday he did not want trade tensions with the European Union, a vital market for a huge economy facing falling exports, to descend into a trade war.

Merkel has already said she favours, in principle, granting China market economy status at the World Trade Organization, and Beijing hopes she can encourage more sceptical EU voices to accept the move.

"China has already fulfilled its obligations on joining the WTO. What's needed now is for the other parties to fulfil the matching obligations they had promised," Premier Li Keqiang told reporters in Beijing on Monday alongside the German leader.

"We don't want to fight a trade war because this will benefit nobody," he said, echoing a similar comment Merkel made on Sunday.

The European Commission is set to accept the WTO switch that will mean China is no longer treated as a state-controlled market, making it easier for Chinese exporters.

But the EU executive also wants to strengthen Europe's ability to defend itself against heavily subsidised Chinese goods.

That reluctance to give up a method to defend against cheap imports has set up a looming dispute at the WTO and the prospect of broader trade friction.

Merkel, on her ninth trip to China as chancellor, said: "It does not help us to emotionalise the whole subject. I am convinced that we can find a solution on the lines of what was promised 15 years ago."

She also pressed China on liberalising its banking industry in return for giving more access to the sector in Europe.

RECIPROCITY

"We will certainly pay even more heed to reciprocity in the financial sector than in classic industry," Merkel said, adding that German banks were restricted by a 20-percent limit on the size of stakes they can buy in Chinese banks.

"Germany has always presented itself as an open investment market," Merkel said. "We expect reciprocity also from the Chinese side."

"In the banking sector, we are at the start of a cooperation," she said.

Li said there were informal barriers in Europe for Chinese banks, which were disadvantaged compared to European and U.S. competitors.

"We need to talk more about how both sides will be treated equally," he said.

Merkel said during a trip to China last year that Germany favoured granting China market economy status in principle but that Beijing still had work to do, including further opening its public procurement markets.

Heads of the European Commission are expected to debate the issue in late June or July, at a time of heightened trade tension after global rivals accused China of dumping cheap steel exports after a slowdown in demand at home.

Li said trade protection measures would not help resolve the problem and that low-end steel was not something China wanted to produce or sell and was committed to phasing out.

Foreign critics accuse China of not following through on its reform agenda and of introducing new regulations that further restrict market access.

"The facts prove that China's market is open. We will be even more open," Li said. "We will take even more steps based on the principles of treating everyone equally, fairness and transparency."

Delegates at a Sino-German cooperation conference on the sidelines of Merkel's visit agreed 96 deals valued at $15 billion, according to China's official news agency, Xinhua.

Airbus Helicopters <AIR.PA> finalised an agreement to build an assembly line on a Sino-German business park in China and to sell 100 helicopters to a Chinese consortium. Daimler AG <DAIGn.DE> and its Chinese partner, BAIC Motor <1958.HK>, pledged to jointly invest 4 billion yuan ($608 million) to expand engine production.

(Reporting by Ben Blanchard and Andreas Rinke; Additional reporting by Jake Spring and Winni Zhou in Beijing and Tim Hepher in Paris; Writing by Michael Martina; Editing by Paul Tait and Robin Pomeroy)