* Government adviser favours insolvency approach - paper
* Hypo's fast growth was fuelled by public guarantees
* State took control to save bank from collapse (Adds detail and background)
VIENNA, Nov 29 (Reuters) - Austria will not let nationalised lender Hypo Alpe Adria go bust, Austrian National Bank Governor Ewald Nowotny said on Friday after a newspaper reported that a top government adviser favoured the idea.
"Austria reached a clear agreement with the European Commission this summer on restructuring Hypo Alpe Adria. We are now proceeding according to this concept. A Hypo bankruptcy is out of the question," Nowotny told the Austria Press Agency.
Der Standard had reported that Wolfgang Peschorn, chief adviser in legal matters, prefers a "dead bank" model - sending the bank into insolvency so that creditors including former owner BayernLB would have to absorb some of the blow.
This approach would save the state 5.3 billion euros ($7.2 billion) compared with alternatives under consideration to set up a new wind-down unit for parts of the bank that Austria had to take over in 2009, the paper said.
Peschorn was not immediately available for comment.
What to do with Hypo has been left hanging as the country's two big parties try to negotiate a new coalition accord after Sept. 29 elections that chopped their combined majority and strengthened the eurosceptic right.
Estimates of how much it could cost to wind down the bank have been as high as 17 billion euros, a figure the Austrian central bank has denied.
Hypo Chairman and task force head Klaus Liebscher has said liquidation was not an option.
Other bankers were also horrified at the idea.
"It is extremely dangerous to play around with this because Austria's reputation is really at stake. I can only warn against this," Bank Austria Chief Executive Willibald Cernko told broadcaster ORF in a radio interview.
The government had to take over Hypo to avoid a collapse with regional implications after its unbridled growth fuelled by public guarantees from its home province of Carinthia drove it to the brink of insolvency.
Backstops granted when late right-wing leader Joerg Haider ran the province still covered nearly 14 billion euros of Hypo liabilities at mid-year, including nearly 760 million at the Austrian bank unit that it is selling to an investor.
Carinthia could not absorb the blow should the guarantees suddenly come due, so the federal government has said it would step in if needed.
Hypo's chronic capital needs threaten to disrupt Austria's drive to cut public debt and budget deficits.
($1 = 0.7353 euros) (Reporting by Michael Shields; editing by Tom Pfeiffer)