EU parliament chief warns of flaws in Europe's banking union
* EU negotiators seek to seal plans to close bad banks
* Parliament president warns of delay to 'unworkable' plan
* Talks failure could knock hole in Europe's crisis defence
BRUSSELS, Jan 21 (Reuters) - The president of the European Parliament has warned it may not be possible to finalise critical legislation dealing with Europe's problem banks on time because differences among negotiators remain deep.
The parliament must sign off on a scheme agreed late last year by EU countries to close failing banks, completing a sweeping reform known as banking union and intended to bolster confidence in the euro zone and its fragile lenders.
But negotiations between the parliament and EU member states to give the green light to the proposals have run into difficulties, raising doubts about whether the scheme to shutter or salvage bad banks can start early next year as planned.
Although the worst of the financial crisis in Europe has passed, any such delay would reflect badly on the region's political resolve and erode confidence in the 18-country bloc using the euro.
European Parliament President Martin Schulz hit out at countries for "developing a set-up that is unworkable". In a letter to the president of the European Commission, the EU executive, he warned of the risk of delay.
In the two-page missive to Commission President Jose Manuel Barroso, Schulz flagged "substantial discrepancies between the ... positions of the parliament and the (EU countries)".
The frank language underscores the delicate nature of the negotiations as well as the real prospect that they could collapse, leaving a gaping hole in Europe's planned defence against future crises.
At stake is Europe's most ambitious reform since the launch of the euro - an agency and fund to shut problem banks as soon as the European Central Bank starts to police them next year.
The United States has also found fault with the plan, which Treasury Secretary Jack Lew recently cautioned was too weak.
The aim is to prevent a repeat of the turmoil caused when failing banks in countries from Ireland to Cyprus brought their states to the brink of bankruptcy.
By setting up a system to shutter troubled lenders, Europe would equip the ECB with the means of dealing with teetering banks. But the system that is emerging is unwieldy, as attempts are made to accommodate sceptical countries.
Sven Giegold, a German member of parliament involved in the talks, said that the proposed scheme for shuttering banks was "so complicated ... that it is neither fair nor efficient" and that there was a chance parliament would not pass the law.
"The possibility that it will not happen is there," he said. (Reporting by John O'Donnell; Editing by Catherine Evans)