* Critics say bill falls short of pledge to fight finance
* Banks must ring-fence prop trading entities by 2015
* Organised backlash in parliament seen as unlikely (Adds finance minister comments, political reaction)
By Lionel Laurent
PARIS, Dec 19 (Reuters) - France's long-awaited bank reform is expected to fall well short of President Francois Hollande's campaign pledge for a "long war" on the financial sector as the country's fading economic fortunes have trumped the urge for stringent regulation.
The overhaul, to be announced on Wednesday, will ultimately hit only a sliver of banks' profit, according to a leaked draft of the bill. That will hand a victory to top banks like BNP Paribas and Societe Generale, reflecting months of intense lobbying.
French Finance Minister Pierre Moscovici, who will hold a news conference to present the law at 1100 GMT, hit back at critics who say the law does not go far enough by saying his aim was also to defend French interests.
"(We must) protect the interests of Paris as a financial centre," he told Le Parisien newspaper. "We went as far as possible."
The draft reform requires banks to ring-fence proprietary trading activities in separate, self-funded entities by 2015, while sparing activities such as market-making, hedging and private-equity financing. Regulatory oversight of these activities will be ramped up.
The ring-fenced entities will be banned from high-frequency trading and commodity derivatives trading.
In principle, this is not far removed from recommendations made in October by a European Union advisory group led by Erkki Liikanen which called for the ring-fencing of a swathe of trading activities. It is also similar to the U.S. "Volcker Rule" which cracks down on proprietary trading.
France's reform defines prop trading so narrowly it leaves much of the riskiness of banks intact, critics say, such as sizeable derivatives portfolios and funding of risky investment vehicles.
"This is worse than a backtrack," said Jerome Cazes, former head of Natixis credit-insurance unit Coface. "It is the minimum you can put in a law without blowing a raspberry to the public."
BNP Paribas only derives about 1 percent of investment-banking revenues from proprietary trading, one of its top executives told reporters recently. It is likely some banks will decide to scrap these businesses entirely.
REBELLION UNLIKELY
The question is whether disappointment among those looking for more radical reform from the Socialist government will translate into an organised backlash in parliament - which is due to debate the law early next year - or among the public.
That looks unlikely at a time when France is struggling with stagnant growth, an unemployment rate at its highest in 13 years and a pullback in bank credit as lenders across Europe slim down to meet incoming post-crisis Basel III capital requirements.
"We are in a phase of economic slowdown and anything that can be done to keep the flow of credit to companies is in line with the public interest," said Philippe Marini, the centre-right UMP party's banking expert in the French Senate.
"Any new rules or split of activities that goes too far would likely have a harmful economic impact ... The Socialist government has come back down to earth."
Socialist lawmakers and senators have defended the proposals, saying they will keep banks in line and protect taxpayers from the cost of bailing them out while, at the same time, protecting the stagnant economy from a body blow.
"We want an economy that works, that creates jobs and that has functioning companies," said Socialist Senator Richard Yung. "We also want banks to do their job of lending to the economy." (Editing by Dan Lalor and Mark Potter)
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