* Social security deficit is heading to overshoot target
* Debt increasingly financed by short-term borrowing
PARIS, Sept 17 (Reuters) - President Francois Hollande's government must limit growth in its welfare spending or risk a dangerous debt spiral that could threaten France's social fabric, the public audit office said on Tuesday.
Cherished in France as the cornerstone of an egalitarian state, the social security system is running huge deficits second only to Greece and Spain in Europe, the independent Cour des Comptes said in an annual report.
The social security deficit has gradually fallen from a peak in 2010, but the pace of decline is slowing and at best would only be stable this year.
"It fuels a particularly abnormal and dangerous spiral of the social security debt," Cour des Comptes head Didier Migaud told journalists, adding that the debt had reached 159 billion euros ($212 billion) last year.
"Balancing the accounts is more than an accounting exercise. It's a national interest which demands a considerable effort to maintain a high level of social protection in our country," he said.
The audit office estimates that the social security deficit will stand this year at 17.3 billion euros, much more than the 14.3 billion euros targeted in the 2013 budget.
The shortfall accounts for nearly 20 percent of the overall public-sector deficit, which the government acknowledged last week would be worse than expected this year and in 2014.
Rather than prescribing a stiff dose of cutbacks, the audit office said spending growth should be slowed and savings could be made by better managing hospitals and out-patient treatment.
"At every level of social spending, savings can be made without undermining our social model or taking drastic austerity measures that other countries have undertaken," Migaud said.
The social security system's debt is mostly managed by a special agency, the CADES, but the burden has in the last three years increasingly been borne by another body, the ACOSS, which funds itself through short-term debt.
"This requires liquidity to be available on the financial markets which is dangerous for social security, especially if currently low interest rates rise," Migaud said.
France's generous social security system is mostly financed by taxes on both employers and employees paid directly into an array of social security funds, rather than to the central state.
Such taxes have grown more than the overall economy in recent years and the Socialist government has said there is no more scope for further hikes without hitting growth and jobs.
Facing weak tax revenues as the economy struggles to gain momentum, Hollande's government raised its public deficit targets last week to 4.1 percent of national output this year from 3.7 percent previously.
It also lifted next year's target to 3.6 percent, up from an initially projected 2.9 percent, taking advantage of two extra years granted by the European Union to bring its deficit down to an EU limit of 3 percent.
European Commission President Jose Manuel Barroso and rating agency Standard & Poor's earlier this week put pressure on France to overhaul its finances more rigorously.
Barroso said France was going in the right direction but could be more ambitious. The rating agency said France had yet to demonstrate that it can consolidate spending. ($1 = 0.7489 euros) (Reporting by Leigh Thomas and Jean-Baptiste Vey; editing by Stephen Nisbet)