* Germany and Brazil discuss currency concerns
* Brazil frets over "tsunami of liquidity"
* Merkel warns against protectionism (Adds quotes and details)
By Andreas Rinke
HANOVER, Germany, March 6 (Reuters) - German Chancellor Angela Merkel said on Tuesday she had received assurances from President Dilma Rousseff that Brazil would take part in a recapitalisation of the International Monetary Fund, which could in turn help boost crisis funds for the euro zone.
The two leaders also said at a trade fair in Hanover they had discussed Rousseff's concerns that a flood of cheap money from industrial nations, including liquidity operations by the European Central Bank, hurt countries like Brazil by leading to an appreciation of their currencies.
Merkel said Rousseff had spoken of a "tsunami of liquidity" but said she had reassured the Brazilian leader that these were only short-term programmes aimed at helping euro zone reforms in order to tackle the debt crisis.
"I made it clear that this is a temporary measure," Merkel told a joint news conference with Rousseff.
On recapitalising the IMF, Merkel said Rousseff had said Brazil was willing to participate.
"The president said Brazil will take part in a refinancing in proportion to its quota," the German leader said.
Brazil has urged Europe to stabilise the euro before the IMF can boost its own capital and release more funds for struggling euro zone states like Greece.
"We have been in favour of boosting IMF funding and bigger Brazilian participation since the G20 meeting in Cannes (last November)," said Rousseff.
With the Brazilian leader linking defensive trade action to the threat to Brazil's economy from overseas liquidity operations, Merkel said it was better to place trust in fellow G20 economies than to erect protectionist trade barriers.
But the chancellor said last week that Europe was working to prevent the creation of any liquidity bubbles.
Brazil's currency has appreciated about 7 percent this year, contributing to a loss of competitiveness for Brazilian exports and an influx of imported goods.
Last week, Brazil extended the reach of a tax on foreign loans to try to limit capital inflows. Its central bank has also bought dollars in the spot market and sold reverse currency swaps to try to limit the rise of its currency, the real.
Merkel said there was no decision yet on the approval of German export credit guarantees linked to the construction of a third nuclear power reactor at Brazil's Angra site near Rio de Janeiro.
The project, launched more than two decades ago but then suspended until 2010, originally involved Germany's Siemens but is now being led by French nuclear power concern Areva.
After Merkel's dramatic U-turn away from nuclear power a year ago, right after Japan's nuclear disaster, some of the German media said it was surprising that Berlin should still be considering credit for a Brazilian nuclear project.
But the German economy ministry said on Monday that a new assessment of the Angra III project's eligibility for credit guarantees would be completed in the first quarter of the year and would take into account Brazilian licensing procedures and the lessons of the Fukushima disaster in Japan.
"The assessment will take into account the following aspects: earthquake security, flooding, power supply and cooling, emergency plans, evacuation possibilities and questions about landslides," a ministry spokeswoman said. (Writing by Stephen Brown; Editing by Susan Fenton)