Cameron and Merkel discuss EU banking union

(LONDON) - British Prime Minister David Cameron and German Chancellor Angela Merkel on Monday said "more work was needed" to reach deal on a European banking union, a key issue for this week's EU summit.

The two leaders spoke by phone and agreed that talks at the Brussels summit about a new banking regulator needed to take into account the bloc's single market obligations, according to a statement released by Cameron's Downing Street office.

"They (Cameron and Merkel) discussed the provisions on banking union and agreed that further work is needed before agreement can be reached," the statement said.

"Chancellor Merkel recognised the need to ensure that the agreed measures respect the integrity of the single market."

The European Union summit, which opens on Thursday, is expected to concentrate on the possibility of a bailout for Spain, the situation in Greece and the banking union.

London wants the banking union to comprise only the 17 eurozone members and be regulated by the European Central Bank rather than falling under the control of the European Commission, the EU executive arm, which oversees the entire single market.

But it is seeking safeguards for Britain's financial sector, which fears it could become isolated and targeted by EU-wide regulations drawn up by members of the new union.

Cameron and Merkel also discussed the EU's budget.

The pair agreed that the next budget had to reflect "the tough spending decisions being made in EU member states," said the statement.

"They plan to discuss this further during a planned visit from Chancellor Merkel to Downing Street in early November," it added.

The 27 EU heads of state are due to meet on Thursday for the two-day summit, the centerpiece of which is expected be a report by European Council President Herman Van Rompuy on the future architecture of Economic and Monetary Union.