* Divisions remain over agency and fund to close banks
* Germany agrees to link national funds but only after 10 years
* Minister to push for early rules to impose losses on creditors
BRUSSELS, Dec 11 (Reuters) - Euro zone countries edged toward agreeing a plan to tackle ailing banks on Tuesday but divisions remain about key parts of the reform that is needed to underpin confidence in the bloc's lenders.
After a financial storm that toppled banks and dragged down states from Ireland to Spain, countries are considering a fresh blueprint outlining what to do when a bank fails, a critical second pillar of a wider reform dubbed banking union.
Sealing a deal ahead of next week's meeting of EU leaders will allow Germany's Chancellor Angela Merkel and her peers to trumpet an important overhaul of banking although their readiness to share the costs of failed lenders, a central tenet of banking union, may fall short of what was hoped.
A draft plan, circulated among EU ministers at a meeting in Brussels, spells out how a new agency may close failing banks chiefly in the euro zone and, crucially, how the cost can be shared out among different national funds in the scheme.
Linking these funds will take 10 years, however, and it will fall to countries to cover the costs in the mean time.
Significant divisions remain. A quick succession of daily meetings have been planned to seal agreement when the ministers meet on the eve of the leaders' two-day summit on Dec. 19-20.
"We have sent a common signal to the markets that the European banking sector is stable," Wolfgang Schaeuble, Germany's finance minister, told reporters.
"Europe is a bit more complicated than the United States but ... we have found a solution," he said, adding, however, that a ministers' meeting next week was needed to finalise the agreement. "Nothing is agreed until everything is agreed."
The new agency to shut banks and a fund to pay for the clean-up will form a second pillar of banking union, as soon as the European Central Bank starts supervising banks late next year.
Stronger countries in the euro zone do not assist weaker ones with direct financial support. Germany, Europe's strongest economy, is reluctant to set a precedent by helping repair banks in struggling countries such as Spain.
On Tuesday, Schaeuble emphasised that it was down to countries to individually shoulder the burden.
To complicate matters further, Germany wants a new treaty agreement between governments in the scheme, a step that could be cumbersome.
France's Finance Minister Pierre Moscovici said that the basis for an agreement had been reached, a view echoed by Michel Barnier, the European commissioner responsible for the law.
But two officials inside the meeting painted a bleak picture. "There are more questions than answers," said one.
Sealing an accord next week is crucial in drawing a line under a financial crisis that first struck Europe more than five years ago with the near-collapse of Germany's IKB.
But building this union is proving divisive as it requires countries to surrender sovereignty and may force them to pay toward repairing banks in neighbouring states.
SHARING THE COST
Winning German's support will also require countries to back an early introduction of rules to impose losses on senior bondholders and large depositors in failing banks, as was done in Cyprus.
Germany has long called for such a fast-tracking of rules, which were originally planned only for 2018.
In the draft paper, officials proposed a starting date of January 2016, an acceleration that would have significant implications for bondholders as well as savers with more than 100,000 euros ($137,200) in their accounts.
A deal among governments on how to wind down banks by the self-imposed year-end deadline is important because it will allow countries to address potential problems revealed by a health check of banks by the ECB next year.
Failure to reach agreement would reflect badly on the bloc's politicians, whose response to the crisis has at times been slow and chaotic.
For the bank union to work, an agency has to get the power to close down a bank.
But Germany, Finland and Slovakia want the final say to go to the European Union's 28 ministers if needed, a process that could bog down attempts to make quick decisions in an emergency.
The draft proposal leaves a question over the issue, proposing a number of different and often unwieldy options when taking the decision to close a troubled bank. Barnier warned that the process proposed was too complex.