EU summit to tackle banking union; Spain on watch BRUSSELS (Reuters) - European leaders will try to bridge deep differences over plans for a banking union at a summit on Thursday but no substantial decisions are expected, reviving concerns about complacency in tackling the three-year-old debt crisis. It will be the fourth time EU leaders have met this year and the 22nd summit held since the crisis erupted in Greece in late 2009. Yet diplomats expect no breakthroughs at the two-day gathering, with the agenda focused instead on longer-term efforts to retool the region's banks and economies. Since the European Central Bank announced last month that it was prepared to buy the bonds of struggling euro zone countries in unlimited amounts under strict conditions, government borrowing costs have fallen sharply and some of the market-led pressure to move rapidly to resolve the crisis has dissipated. Yields on the 10-year government bonds of Ireland, Italy and Spain have fallen by between 1 and 1.5 percentage points in the past six weeks, reflecting a much-reduced level of risk and limiting the need for immediate intervention. At the same time, efforts to forge ahead with the setting up of a banking union across the eurozone and parts of the wider EU have stalled, amid differences between Germany and other member states over the timetable and scope of the initiative. The banking union proposal, backed by leaders at the last summit in June, is the first stage in what is seen as a four-pronged strategy to overhaul the monetary union and prevent future crises. Other steps for the future are a 'fiscal union' for budgets, an 'economic union' and a 'political union'. The first aim on the banking side is to create a single banking supervisor under the ECB, but the original goal of having that in place by January 2013 already looks in doubt, and it may not be fully up and running until 2014. Joerg Asmussen, Germany's representative on the ECB's executive board, said on Wednesday the central bank would not be ready to start overseeing banks from early next year, even if the legal structures are in place by then, and said it was more important to do it properly than to do it quickly. The latest draft conclusions agreed ahead of the summit and obtained by Reuters on Wednesday said only that a single supervisor was a "matter of priority" and leaders should have the "objective of completing it by the end of the year." Euro zone leaders now find themselves hovering between two courses of action - dealing with immediate problems in Greece, Cyprus, Portugal and Spain, and the longer-term goal of overhauling the structures that underpin their currency project. But they do not appear minded to take firm action in either direction during the two-day summit, instead leaving the more difficult decisions on banking union and the steps that are expected to follow it until later in the year at the earliest. And while euro zone leaders may include a brief word on Greece in their final summit statement on Friday, clear decisions on helping Cyprus, Greece and Spain may only come at a finance ministers' meeting next month, officials say. As EU and IMF negotiators prepared to leave Athens to brief the leaders in Brussels, they said Greece had agreed to most of the cuts and reforms needed for fresh aid and the Greek prime minister said he was confident of a deal soon. Greek workers, however, stage a general strike on Thursday, in the hope of making their anger heard in Brussels. Greece's small neighbor Cyprus saw its debt rating pushed deeper into junk status by agency Standard & Poor's on Wednesday and its finance minister said he expected aid talks to start in the coming week. Spain, which has already received a commitment of up to 100 billion euros to recapitalize its banks, has been ready to ask the euro zone for a bond-market support package for several weeks, officials have told Reuters, but Germany has urged it to hold off, worried about the potential repercussions. With Spain's economy twice as large as those of Greece, Ireland and Portugal combined, a full-blown rescue could put huge strain on the euro zone's resources and send signals of distress to the wider European and global economies. Spanish Prime Minister Mariano Rajoy has said he will request help when borrowing costs become unbearable, but with Spanish 10-year bond yields falling 30 basis points on Wednesday to stand at 5.48 percent, that may still be some way off. The International Monetary Fund's chief economist was quoted on Wednesday as saying that both Spain and Italy should be under a program that guaranteed their market access in return for meeting conditions on economic reforms. "In the short-term it would be crucial to have a plan for the two countries of the (euro zone) periphery," the IMF's Oliver Blanchard told Italy's Il Corriere della Sera newspaper, referring to Spain and Italy. This would be conditional on them sticking to their commitments... We are almost there but not quite at that point yet," he said. Italian Prime Minister Mario Monti believes a Spanish request could be enough to calm markets and has repeatedly said Rome does not need assistance for itself. In the absence of any requests for assistance in the coming weeks, perhaps not until mid-November, EU leaders will instead discuss in depth the banking union plan and a proposal for creating a single budget among the 17 euro zone states. But the deeper the discussion on banking union goes, the more complex, challenging and problematic it gets. As well as disagreement over the timeline for a single supervisor - a prerequisite for the euro zone's rescue mechanism to be able to recapitalize banks directly - there is a dispute about how it will function. Countries outside the euro zone - particularly Britain, which has a vast banking sector - are concerned their banks could be disadvantaged if no balance is maintained between the ECB and its oversight of euro zone banks, and the responsibility of other authorities to oversee non-euro zone banks. And if non-euro zone countries join the banking union, as policymakers are hoping, it is unclear what representation they would then have within the ECB, since the central bank is currently answerable only to euro zone member states. Those complications will not be ironed out on Thursday and Friday, and may not be resolved for months to come, making it all the more unlikely that the legal structures to establish a single supervisor will be ready by January next year. Editing by Alastair Macdonald