FRANKFURT, April 25 (Reuters) - Financial markets in the euro zone improved in the second half of the last year, but they remain fragile and any signs of banking union plans stalling could send them back into a tailspin, the European Central Bank said on Thursday.
European leaders agreed on plans to establish a banking union and the European Central Bank unveiled a new bond-buying plan in the middle of last year, which contributed to market improvement.
The banking union is one of the key projects to improve the economy of the 17 countries sharing the euro. It would help eliminate many of the problems that now hold back the flow of credit needed to finance a euro zone economic recovery.
The German government, however, believes that the plans might require a European Union treaty change, which is a lengthy process, and the ECB warned against plans stalling.
"In spite of the improvements in market conditions since then, the climate in the financial markets remains fragile," the ECB said in its annual report on Financial Integration in Europe.
"Further progress towards the establishment of a single supervisory mechanism, as well as other components of the banking union, will be a critical factor underpinning financial market performance this year."
The ECB also said that late last year, money markets also improved, but banks are still more comfortable doing business with other banks in their home countries.
"Indicators still show a 'home bias' with respect to interbank counterparties and a continuing dependency of some banks on the Eurosystem's liquidity support," the report said. (Reporting by Sakari Suoninen)