Scottish nationalists call time on austerity and look to UK deal

* UK faces close national election on May 7

* Scots nationalists could be third biggest party

* Nationalists could back minority Labour government (Updates after speech)

By Russell Cheyne and Kylie MacLellan

EDINBURGH/LONDON, April 20 (Reuters) - The Scottish National Party set out plans for higher public spending on Monday, aiming to reverse five years of austerity measures as it goes into a close-run UK election with hopes of winning the power to broker the next British government.

Polls show neither Prime Minister David Cameron's Conservatives nor the opposition Labour Party are likely to win an outright majority at the May 7 election, the outcome of which could influence whether Britain leaves the European Union or Scotland launches a fresh bid for independence.

The Scottish National Party (SNP), which has rebounded after leading a failed bid for independence last year, is on track to virtually wipe out Labour in Scotland.

That could see it become Britain's third biggest party by seats, but SNP leader Nicola Sturgeon reassured voters outside of Scotland on Monday that she was seeking changes that would benefit the whole of the United Kingdom.

In the event of an inconclusive election result, the SNP hopes it will have a decisive say over who forms the next government and has said it will only do a deal with Labour.

Launching a manifesto that included backing for many Labour policies, Sturgeon said ending state spending cuts would be the SNP's "number one priority."

"It is time to end the needless pain," she told an audience of SNP supporters in Edinburgh.

"In the last five years, austerity has undermined our public services, lowered the living standards of working people, pushed more children into poverty and held back economic growth."

The SNP plans to free up 3 billion pounds ($4.5 billion) a year for extra spending by scrapping the renewal of Britain's Trident (BSE: TRIDENT.BO - news) nuclear deterrent.

The Labour party, however, backs a renewal of Trident.

"HAND OF FRIENDSHIP"

Labour leader Ed Miliband has ruled out a formal coalition with the SNP, but not a looser vote-by-vote arrangement.

The Conservatives are trying to sow concern among voters in the rest of the UK over a potential Labour-SNP partnership.

Defence Minister Michael Fallon described the SNP's manifesto as "the most expensive ransom note in history" and Cameron warned a Labour-SNP deal would imperil the economic recovery. The prime minister also promised a Conservative government would ensure plans to devolve further powers to Scotland did not have a detrimental affect on other parts of the country.

Sturgeon is proposing an alternative to austerity, pitching real-term public spending increases of 0.5 percent per year in areas such as jobs, economic growth, and public services.

She argued that Cameron's comments reflected "panic and desperation" and promised voters that her party was not seeking to wield a destructive influence in the British parliament.

While the SNP continued to back independence, the election was not about separating from the United Kingdom, she stressed.

"If the SNP emerges from this election in a position of influence, we will exercise that influence responsibly and constructively," Sturgeon promised.

"In this election I am offering to people elsewhere in the UK a genuine hand of friendship ... I am saying very clearly we can work together to get the change that people in Scotland and in my experience many, many people across the rest of these islands want as well." ($1 = 0.6694 pounds) (Additional reporting by Paul Sandle; Editing by Andrew Osborn and Sophie Walker)