European leaders have come out in favour of deepening defence cooperation across the 28-member bloc, but remain divided over the possibility of creating a European Union-wide military force.

While most EU countries agreed to cooperate militarily during talks at a two-day European Council summit in Brussels on Thursday, differences persist over whether that means creating fully-fledged EU forces, or strengthening separate, national militaries.

"It makes sense for nation states to cooperate over matters of defence to keep us all safer... but it is not right for the EU to have capabilities, armies, airforces and the rest of it," British Prime Minister David Cameron said.

"We have to get that demarcation correct between cooperation which is right but EU capabilities which is wrong," Cameron added.

German Chancellor Angela Merkel, who just began a new four-year mandate, signalled her backing of greater EU cooperation on defence.

"We can pool our armament activities but above all, we must also have a coordinated policy," she said.

NATO chief Fogh Anders Rasmussen told AFP news agency he wanted to see European leaders do more militarily, and pressed the need for drones and air-to-air refuelling aircraft.

"If European nations invest more in military capabilities, they will also make stronger contributions to NATO," Rasmussen said on Thursday.

"It is about making sure that the countries of Europe are strong and capable. So that they can contribute to crisis management when they choose, and how they choose - whether it be through the European Union, NATO or any other way," he said.

Bank deal

Despite their differences over defence, the 28-nation EU bloc agreed to a landmark bank deal just before the summit.

The accord paves the way for a single body to police and wind up ailing banks, and will be backed by a fund paid for by the banks themselves, to avoid using taxpayer money.

It is one of the biggest handovers of sovereignty to the EU since the creation of the single currency, the Euro.

All 17 countries currently sharing the Euro will be bound to the scheme, while non-Euro member states will have the option of joining.

Proponents say the banking union will ensure stability, and facilitate much-needed growth and jobs.