European leaders reach key deal on banks

Under the deal, European leaders agreed to create a single supervisory body to oversee the eurozone's banks which could use the single currency area's rescue funds, the European Financial Stability Facility or European Stability Mechanism, to aid banks directly without adding to governments' debt.

European Union leaders are hoping for implementation of the agreement by July 9, an EU statement said.

The deal means Spain's formal request this week for eurozone bailout funds to recapitalize its troubled banking sector will not add to its sovereign debt. Madrid had feared the increased debt load would send its borrowing costs even higher.

Ireland, which hopes to rework the terms of its bailout deal, and Italy, which like Spain is battling with spiraling government borrowing costs, could also benefit from the new deal.

European Council President Herman van Rompuy announced the agreement, seen as a concession by German Chancellor Angela Merkel, after a marathon late-night meeting in Brussels, Belgium.

"We agreed on something new, which is a breakthrough, that the banks can be recapitalized directly in certain circumstances," he said.

"The most important condition is that we have to put in place a single supervisory mechanism and second decision is that we are opening the possibilities to countries who are well behaving ... to make use of financial stability instruments ESFS, ESM in order to reassure markets."

The deal is a big step toward a closer banking union across the 17-nation eurozone, which could be seen as a precursor to fiscal union.

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