* Millions of people are running low on cash
* Modi says demonetisation part of war on graft
* Cash crunch hits countryside, market traders
* Jaitley says ATMs to be reset in two weeks (Adds finance minister comments)
By Sanjeev Miglani and Nidhi Verma
NEW DELHI, Nov 12 (Reuters) - Anger intensified in India on Saturday as banks struggled to dispense cash following the government's decision to withdraw large denomination notes in an attempt to uncover billions of dollars in undeclared wealth.
Tempers frayed as hundreds of thousands of people queued for hours outside banks for a third day to swap 500 and 1,000 rupee bank notes after the notes were abolished earlier in the week.
The banned bills made up more than 80 percent of the currency in circulation, leaving millions of people without cash and threatening to bring much of the cash-driven economy to a halt.
"There's chaos everywhere," said Delhi Chief Minister Arvind Kejriwal, a rival of Prime Minister Narendra Modi, accusing the premier of wreaking havoc on poor and working Indians while the wealthy found ways to skirt the new rules.
Customers argued and banged the glass doors at a Standard Chartered branch in southern Delhi after security guards blocked the entrance, saying there were too many people inside already.
Others turned on Modi, criticising his ongoing visit to Japan while ordinary people suffered at home.
"He is taking bullet train rides in Japan and here you have old people knocking on bank doors for cash," said Prabhat Kumar, a college student who said he had spent six hours in the queue. "He has made a terrible mistake."
Modi said he would pursue the fight against corruption and tax dodgers even if it meant scanning decades-old records.
"If unaccounted money is found out during the current clean up drive, accounts of tax evaders dating back to the country's independence in 1947 will be checked. If required I will hire people for this task," Modi told the Indian community in Kobe.
He said he recognised people faced difficulties as the transition to the new series of bank notes takes place but was confident they would stand by the decision as part of the war against corruption and to rid India of endemic poverty.
TRADERS STRUGGLE AS CASH CRUNCH BITES
Nearly half of India's 202,000 ATMs were shut on Friday and those that operated quickly ran out of the new notes as scores of people descended upon them.
Finance minister Arun Jaitley said ATMs had not been adjusted to handle new currency notes prior to the announcement in order to keep it under wraps. "Recalibration of ATMs will be completed within two weeks," he added.
Referring to inconvenience caused to public, Jaitley said there could be some, short-term disruptive cost to the economy due to the demonetisation drive but this would prove positive in the longer term.
Traders in Delhi's vegetable market said they were considering shutting down the market as cash was running out and banks were dispensing a limited amount.
"We might have to close down until the situation stabilises," said Metharam Kriplani, president of the Chambers of Azadpur Fruit and Vegetable Traders.
People in Mumbai said grocers were charging 10 times the price of salt in return for accepting the old cash notes.
The government has asked people to exchange the old 500 and 1,000 rupees notes by Dec. 30. The central bank said there was enough cash available with banks and that it had made arrangements to deliver the new bank notes across the country.
Modi's move was aimed at shrinking the "black economy", the term widely used to describe transactions that take place outside formal channels and which could be as high as 20 percent of gross domestic product, according to investment firm Ambit.
People swapping old notes will have to present proof of identity and depositors of abnormally large sums could be investigated by tax authorities.
India has unearthed 1.25 trillion rupees ($18.51 billion) of undeclared "black" money, including 670 billion rupees in the recent income disclosure scheme, since his government came to power in 2014, Modi said.
Much of India's rural economy is powered by cash, with few people regularly using a bank account.
In Dudko, about 75 kms (45 miles) from Delhi, villagers said they were finding it difficult to pay for food and fuel four days into the cash crunch.
"Bank officials are saying they will give the money on Monday. How will we make purchases?" said Sunita, a woman who was preparing for her daughter's wedding later this month. ($1 = 67.5299 Indian rupees) (Additional reporting by Delhi, Mumbai and Bengaluru newsrooms; Editing by Helen Popper)
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