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* Germany's Schaeuble: no euro zone cash for failed banks
* France, Spain, Italy press for common backstop
* ECB says fund to close banks needs single credit line
By Robin Emmott and Annika Breidthardt
BRUSSELS, Dec 18 (Reuters) - Germany is standing firm against the use of euro zone money to back a scheme for tackling troubled banks, dousing hopes still harboured by its peers that the bloc will unite behind lenders in difficulty.
More than five years since a financial crisis struck, Europe is crafting its 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.
European leaders - who meet at a summit on Thursday and Friday - want to sign off on a deal so that banking union can become reality from the start of 2015, raising investor confidence and fostering more lending.
The aim is to prevent a repeat of the turmoil when failing banks in countries from Ireland to Cyprus brought their states to the brink of bankruptcy. But just as talks reach a climax, central elements of the plan are disintegrating.
Arriving for a second day of negotiations in Brussels, Germany's finance minister said no money from the euro zone's rescue fund, the 500-billion-euro European Stability Mechanism (ESM), would be available directly to pay for bank clean-ups.
Instead, a government footing the bill for a failing bank and falling short, could apply for a bailout paid for by the ESM.
That deals a blow to a central tenet of banking union as it was originally conceived, namely that weak governments should not be left to cope with banks, whose problems can buckle a country.
"The only way to the ESM is through the nation states," Wolfgang Schaeuble told reporters, reiterating the long-held German view that such help can be given only to governments and not directly to banks.
Instead, he talked about unspecified "additional means of granting loans".
Unlike in the United States, where the federal government can transfer funds to help weaker states, countries in the euro zone do not send such aid. Germany, which makes up more than a third of the euro zone's economy, wants to keep it that way.
Euro zone finance ministers agreed on Tuesday night that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros ($76 billion) over 10 years in a Single Resolution Fund (SRF).
Until then, if there is not enough money available, governments will be able to impose more levies on banks. If that does not suffice, they would help with public money and after that turn to the ESM for help.
After 2025, when the SRF is full, it could borrow to raise additional emergency itself, the draft euro zone ministers' agreement said. That was put to a meeting of all 28 EU finance ministers on Wednesday.
Schaeuble's blunt message jarred with that of his French and Spanish peers, who appeared to understand the role of the ESM differently.
The dissonant voices cast a question mark over whether the new scheme to close banks and the entire banking union project.
"Using the ESM has not been ruled out at all," Luis de Guindos, Spain's economy minister, told reporters, a line echoed by his Italian counterpart Fabrizio Saccomanni.
Asked if the euro zone was breaking the 'doom loop' between struggling banks and their states, French Finance Minister Pierre Moscovici said: "That was exactly the purpose and that is what we are going to achieve."
The European Central Bank, on whose support many banks depend, has become agitated because delays and uncertainty over how failed lenders will be dealt could compromise attempts to clean up the financial sector after ECB health checks next year.
"The single fund should have a credit line," Vitor Constancio, a member of the ECB's executive board, told ministers in part of the meeting that was broadcast.
His boss, Mario Draghi, said on Monday that the latest plan may be too complex and inadequately funded.
But there is little chance of a back-up without German consent.
Completing a banking union is central to keeping the euro safe in the long term, a currency bloc that is as political in its goal of deepening European integration as it is economic.
The euro lacks the workings of a normal currency union such as in the United States, which has a central finance ministry and central regulators alongside a central bank. Europe's banking union had promised to help change that.
To compound matters, negotiators have also devised an unwieldy system to close a bank that may involve ministers from across the 28 countries in the European Union.
"We have to move fast in emergencies to resolve certain banks. I am concerned about decision making ... this remains too complex," Michel Barnier, the European commissioner in charge of financial regulation, told ministers in the meeting.
"We are building up a single system, not an intergovernmental network with several tiers," he said.
What results in the end is likely to be far off what investors had originally expected. One leg, a common system of deposit guarantees, will not be part of it. EU negotiators agreed here only to standardise the rules on saver protection.