* European leaders seek to bridge divisions on bank union
* EU's Barnier says proposed banking union is "legally sound"
* EU advisers explore hurdles to giving non-euro states ECB voice
By John O'Donnell
BRUSSELS, Oct 18 The European Central Bank can oversee lenders in a banking union, the European Union's top regulatory official said on Thursday, playing down a report that said a proposed new ECB supervisory structure would be illegal.
The EU is in the process of trying to establish a banking union among the eurozone and any non-eurozone countries that want to join, with a single supervisory authority attached to the ECB being put in charge of overseeing all the banks.
The Financial Times reported on Wednesday that one of the EU's top legal advisers had written an opinion saying the new structure would be "illegal" and that changes would more than likely have to be made to the EU's treaty.
While the 12-page opinion does raise a series of concerns about the legal obstacles that will have to be negotiated to allow the ECB to carry out the proposed role, it does not state categorically that it would be illegal.
"The Council may establish a supervisory body within the ECB as long as the bodies and rules established by the treaties for final decision-making within the ECB remain unaltered," the Council Legal Service said in the conclusion of its report, seen by Reuters.
Michel Barnier, the European commissioner in charge of financial regulation and one of the authors of the original proposal to create a banking union and give the ECB oversight, said the plan had been examined and was legal.
"The proposal that we have made is legally sound," said Barnier. "I do not see any political obstacles to giving non-euro countries a decisive voice in the single supervisor, if they want to join," he said in a statement.
"We need to make sure that the final solution is solid from both the political and legal perspective."
Barnier's remarks came as one of his senior officials said it would be wrong to conclude that the decision-making structure proposed for the ECB in the oversight role would be illegal.
"Legal issues for the creation of (an) ECB supervision mechanism can all be solved," Jonathan Faull, the director general of the European Commission division responsible for banking union, said on Twitter.
Another EU official, speaking on condition of anonymity, said the European Commission's legal service had found no major problems with the proposed supervisory structure, and the ECB's legal team was also expected to permit it, he said.
European leaders were preparing to meet for a two-day summit where they will try to bridge division over a banking union, including plans for a single banking supervisor, a move to resolve one of core problems fuelling the debt crisis.
They will address one of the major obstacles to the project: how to cater for the 10 EU countries that do not use the euro, and allay fears that they could be sidelined or disadvantaged whether they chose to join or stay out of the new structure.
In the legal service's report, experts set out the complications of including a country that does not use the euro in a scheme designed chiefly for the euro zone's 17 members.
Officials spell out the limitations of the structure of the ECB, which is due to take over the supervision of banks, and the difficulties of fully involving non-euro-zone countries in the central bank's decisions, since under the EU treaty, the ECB is solely responsible for countries in the currency union.
The document, addresses one option to accommodate non-euro countries -- the creation of a new body within the central bank where regulators from countries outside the euro would have a say. The experts say this would not breach EU law, so long as the final decision on supervision remains with the ECB.
One of the concerns of countries outside the euro, such as Hungary, is that it would not receive an equal say in supervisory decisions if it joined the banking union.
The ECB could, for example, demand a euro-zone bank keep back more capital to cover losses, a request that could lead to it reigning in lending in the bank's Hungary arm, with Budapest powerless to oppose.
"There are a lot of banks with links between the euro zone and non-euro-zone countries. A lot of countries, including Germany, really want these other countries to be involved," said one EU official.