By Paul Carrel

BERLIN (Reuters) - German Chancellor Angela Merkel's veteran finance minister, Wolfgang Schaeuble, jumped to the defense of her conservatives' Bavarian sister party in the latest twist in a row over migrants that is damaging her re-election prospects.

Merkel's Christian Democrats (CDU) and the Bavarian Christian Social Union (CSU) have spent the last year locked in the dispute, which now centers on the latter's demand to cap the number of migrants coming into Germany at 200,000 a year.

Merkel, whose CDU suffered a drubbing in a state election in Berlin on Sunday, has refused to agree to such a limit. But the allies know they must reach a compromise soon that allows them both to save face and focus on next year's federal election.

Schaeuble defended CSU leader Horst Seehofer, a significant intervention from a senior conservative after other Merkel allies blamed the Bavarians' relentless attacks on her open-door refugee policy for the CDU's poor showing in the Berlin vote.

"It is an outrage to insinuate that Bavarian premier Horst Seehofer is against the dignified treatment of refugees," the finance minister told weekly magazine Wirtschaftswoche in comments released on Thursday.

"In Bavaria, there are fewer far-right attacks on refugees than elsewhere," added Schaeuble, who is not close to Merkel but used his popularity in their party to help her win backing for financial aid to Greece during the euro zone crisis.

Merkel, Seehofer and senior figures from their parties had a "constructive" meeting in Berlin on Thursday evening to try to narrow their differences, according to sources familiar with the meeting. No decisions had been expected on the migrant cap.

The conservatives did agree to tackle a new distribution of finances between the federal government and the states, a topic that has proven divisive in the past.

Schaeuble could be a CDU candidate for chancellor should Merkel not seek re-election next year, though he brushed off questions about whether he could seek the office or even the German presidency in a television interview last week.

"Why don't you ask me if I want to be Pope?" he responded.

Wheelchair-bound since a deranged man shot and crippled him in 1990, Schaeuble turned 74 on Sunday and cast himself as a loyal minister in the Wirtschaftswoche interview.

"I am fulfilling my duty as finance minister," he said.

Merkel, 62, said on Monday she would turn back time if she could to better prepare Germany for last year's migrant influx, when some one million migrants entered the country.

Her uncharacteristically contrite remarks were a clear attempt to mend fences with the CSU, though Seehofer is keeping up pressure on her to compromise on the migrant cap.

Jens Spahn, deputy finance minister and a senior member of Merkel's conservatives, told the Rheinische Post newspaper that the CSU proposed cap could even be too high, citing the failed integration in the past of some migrants with Arabic or north African backgrounds.

He also urged the EU to conclude an agreement with north African nations to ease the repatriation of those rescued at sea who fled for financial reasons and were later denied asylum.

CDU officials have played down any prospect of an immediate breakthrough, but the parties want to resolve the migrant row before a CDU congress in early December at which Merkel could announce she will run for a fourth term.

The CSU accounts for roughly 20 percent of the conservative bloc of votes in the federal parliament and she needs its support to stand again. Asked on Monday whether she will run in 2017, Merkel declined to comment.

(Writing by Paul Carrel, Additional reporting by Andreas Rinke; Editing by Catherine Evans and Diane Craft)