UK sounds alarm on banking union

He warns of London's concern that the euro area, having an "automatic qualified majority", will in be "able to set rules for the EU as a whole."

"There may be decisions the euro are has to take to protect its financial stability, which could be detrimental to the rest of the EU if imposed on them."

"For a country such as the UK with a large financial sector, there may be decisions we have to take to protect our taxpayers and our financial stability that may not be possible if we are constrained by rules set only for the single currency area."

This makes it "entirely reasonable" for countries not in the banking union to "seek safeguards that protect their taxpayers and preserve the single market for all EU members."

The statement is an anticipatory shot ahead of the EU summit later this month. At the meeting, EU leaders may agree to set up a banking union - including a EU supervisor, bank deposit guarantees and a European bank resolution scheme.

UK Prime Minister David Cameron is set to raise London's concerns at the summit. "We need to give careful thought about how we fit a banking union and a single market together. But we don't need a detailed discussion about that at the June European Council," said one UK diplomat.

It is unclear whether the banking union will require a full treaty change. EU commission president Jose Manuel Barroso outlined a version recently which he said would not. Others have different views.

The likely further integration of the 17-nation eurozone puts London in an odd position.

While its calling for further euro integration to stave off a possible single currency collapse - which it acknowledges it has a "strong interest" in avoiding - it is also hinting it will veto changes it does not like.

It is unclear how many friends the UK has in this battle. The ten non-euro countries have amorphous interests. Some may want to join a banking union. It is one of the many open issues ahead of the 28 June Brussels summit.

But the speed and profound nature of the eurozone crisis has altered the debate. There is general acceptance that the euro area needs to press ahead whether the full 27 members are onboard or not.

"If Britain cannot, because they are not in the euro area, go for more integration, we should find a way where this is possible to accommodate these different concerns," said Barroso in a recent interview.

German chancellor Angela Merkel last week said countries that want to integrate further should not be held up by those who do not.