BRUSSELS (Reuters) - German Chancellor Angela Merkel raised new hurdles on Friday to using the euro zone’s rescue fund to inject capital directly into ailing banks from next year, dashing Spain’s hopes of soon removing the cost from its strained national debt.

Spain's Prime Minister Mariano Rajoy Brey (L) and Germany's Chancellor Angela Merkel shake hands at a European Union leaders summit in Brussels October 19, 2012. REUTERS/Sebastien Pirlet

Merkel’s move limited the impact of a key decision by European Union leaders struggling to overcome a three-year-old debt crisis in the 17-nation currency area -- an overnight agreement to establish a single banking supervisor from next year.

Spanish Prime Minister Mariano Rajoy, who received a euro zone pledge in June of up to 100 billion euros to recapitalise a banking sector hit by a burst real estate bubble, said he had still had not decided whether to request a sovereign bailout.

EU leaders agreed at a two-day summit that the European Central Bank will take responsibility for overseeing euro zone banks from next year, but Merkel said it would take time for the new supervisor to be fully effective.

She made clear that would not lead to the bloc’s European Stability Mechanism (ESM) rescue fund taking over liability from member states such as Spain for past bank rescues, and she posed extra conditions that some diplomats said seemed designed to ensure there will be no capital injections before next September’s German elections.

“There will not be any retroactive direct recapitalisation,” Merkel told a news conference. “If recapitalisation is possible, it will only be possible for the future, so I think that when the banking supervisor is in place we won’t have any more problems with the Spanish banks, at least I hope not.”

The chancellor said the supervisory system would have to be effective and the euro zone would have to set up a bank resolution fund to which the banks would contribute if there was to be any direct capital assistance to troubled banks.

Merkel denied that the obstacles were intended to avoid any payments having to be approved by the German parliament before the 2013 election, saying the idea had never crossed her mind.

French President Francois Hollande said on day one of the summit that Germany’s lack of urgency could be related to its electoral calendar, adding that the two dominant EU powers had a duty to solve the crisis.

Despite Merkel’s comments, euro zone officials said they were exploring the possibility of sharing the cost of dealing with “legacy” toxic bank assets between the ESM and host governments, a crucial step to break to so-called “doom loop” between sovereigns and banks.

NO SPAIN DECISION

Pressed to say whether Spain would request a precautionary credit line from the rescue fund to trigger ECB buying of its bonds, Rajoy said: “The decision is not taken yet. What is important is that if I need to take it, I will take it.”

He gave no indication of when that might be, but euro zone officials pointed to a November 12 finance ministers’ meeting as the next potential date for decisions on aid to Spain and further assistance for Greece, which is struggling to implement a second bailout programme.

In a sign of growing resistance to EU-backed austerity measures and mass unemployment, Spanish trade unions called a 24-hour general strike for November 14, when Portuguese workers also plan to stop work and the European Trade Union Confederation has called for EU-wide protest actions.

Italian and Spanish borrowing costs tumbled sharply on Friday, partly due to Italy’s success in raising a record 18.3 billion euros in funds with a four-year index-linked bond targeted at retail investors this week.

British Prime Minister David Cameron meanwhile threatened to veto a seven-year budget plan for the EU, due to be agreed at a special summit next month, if it mirrored “unacceptable” proposals by the European Commission for an increase in EU spending at a time when member states are making cutbacks.

Cameron told reporters Britain planned to use the reshaping of euro zone governance to renegotiate its own membership of the EU to achieve looser terms.

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Britain, home to Europe’s biggest banking sector, is also concerned its banks could be disadvantaged if a balance is not maintained between the ECB and its oversight of euro zone banks and the powers of other authorities to oversee non-euro zone banks.

Merkel confirmed that the ECB would eventually supervise all 6,000 banks in the euro zone, although day-to-day oversight would be mostly carried out by national supervisors.

Officials said the supervisory body, which Merkel said would have about 400 staff, would first take responsibility for banks receiving state aid, then large cross-border, systemically important institutions, extending to all banks by 2014.

“There was an agreement, a good agreement, on timing and about the banks as a whole,” Hollande told reporters.

European Council President Herman Van Rompuy said the 27 leaders agreed to adopt a legal framework by the end of this year giving the European Central Bank overall responsibility.

One of the thorniest issues -- what representation non-euro zone banks that decide to join the scheme will have at the ECB -- was left to one side and will have to be resolved by the end of the year, along with a number of other legal obstacles.

Germany remains opposed to a joint deposit guarantee, which the International Monetary Fund and many economists consider a key component of a banking union to deter capital flight.

Berlin has been reluctant to see its politically sensitive savings and cooperative banks come under outside supervision. It rejects any system under which Germany or its banks might have to underwrite troubled lenders in poorer states.

Hollande said the leaders did not discuss possible aid for Spain, another critical issue in resolving the crisis, but he laid out a series of steps that could help turn a corner.

“I have the confirmation that the worst is behind us,” he said at a news conference in the early hours. “We are on track to solve the problems that for too long have been paralysing the euro zone and made it vulnerable.”

On Thursday, Merkel demanded stronger authority for the executive European Commission to veto national budgets that breach EU rules. She said a December summit would take decisions on these issues of closer euro zone economic governance.

Merkel also advocated the creation of a European fund to invest in projects in member states which she said could be fuelled by a financial transaction tax which 11 euro zone countries have said they will adopt.