BRASILIA (Reuters) - Brazil's Finance Ministry is expected to present a proposal on debt service for states that represents a middle ground in the debate amid calls for reduced burdens, Sao Paulo Governor Tarcisio de Freitas said on Wednesday.

According to the governor of Brazil's most populous state, regional debt stocks are growing faster than the economy and states' revenue expansion, creating an "unpayable debt."

Speaking to reporters following a meeting with Finance Minister Fernando Haddad, Freitas said the proposal will be presented to President Luiz Inacio Lula da Silva next week and discussed with the governors after the presidential greenlight.

The aim is to reach a final text within 60 days, generating a bill that should be sent to Congress in the first half of this year, he added.

Freitas said that governors from the South and Southeast regions proposed the correction of debts to the federal government to match the long-term growth of the Brazilian economy, at 3% per year.

However, he emphasized that the Finance Ministry will make another proposal and expressed confidence that the parties will reach "a middle ground," allowing states to have greater cash availability for investments without harming federal public coffers.

Regional debts are currently corrected within a hybrid model that takes into account both the benchmark interest rate Selic - currently at 11.25% per year - and the inflation rate plus a percentage of 4%, said Freitas.