European Union finance ministers and central bankers agreed on Saturday to step up co-operation among themselves to improve their handling of cross-border financial crises.

But a detailed solution to the tricky question of which country's money would be used to bail out a cross-border bank remained to be thrashed out.

"Growing market integration in the European Union constitutes a factor for financial stability because a broader and more diversified financial system is better able to absorb potential shocks and to prevent them," Portuguese Finance Minister, Fernando Teixeira dos Santos told reporters.

"Nonetheless, the growing number of institutions operating across borders also face us with new financial stability challenges," said Teixeira dos Santos, whose country holds the rotating EU presidency.

Ministers agreed to extend a memorandum of understanding they signed in 2005 on cooperating in a cross-border financial market crisis to include common principles for crisis management, a common framework for assessing the fallout from a crisis and practical guidelines on handling a crisis.

Groups of EU states are also encouraged to work together on specific issues.

The move to deepen cooperation is part of a longstanding review after a group of finance ministry and central bank officials said the current cross-border crisis management system was not working well enough.

A senior euro zone source, who asked not to be named, said on Saturday the European Union was not prepared to handle a failure of a pan-European financial institution.

The issue is topical as the current credit squeeze due to problems in the U.S. subprime mortgage market has claimed two casualties in Germany, IKB and SachsenLB, which needed bailing out.

And on Friday the Bank of England stepped in on Friday to rescue Northern Rock, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds.

NO DETAILED SOLUTIONS

But so far, the current turmoil has not sunk a cross-border investment firm to trigger the dilemma of whether taxpayers money should be used in a bail out and if so, which country or countries it should come from.

EU Internal Market Commissioner Charlie McCreevy welcomed the blueprint but said the burden-sharing issue needed sorting out.

"We are making progress but I would not want to put it any stronger than that," McCreevy told reporters on the sidelines of the meeting.

"We are moving to the next stage. You can only move as fast as you are allowed," McCreevy added.

European Central Bank President Jean-Claude Trichet said the blueprint was acceptable as it did not contain a detailed "ex ante" burden-sharing concept.

"We encourage intimate co-operation between all banking authorities. We also insist on flexibility. Flexibility is really of the essence," Trichet told a news conference.

German Finance Minister Peer Steinbrueck said he opposed strict "game rules" for crisis prevention.

"I'm in favor of much flexibility with principles. I cannot imagine that those who have the right to vote on the budget -- parliament -- would be obliged to provide tax payers money for ex ante arrangements," Steinbrueck told reporters.

Saturday's move was based on recommendations made by the Economic and Financial Committee made up of high level finance ministry and central bank officials in the EU.

"The present EU arrangements for financial stability...may not ensure timely, efficient and least-cost solutions in a cross-border context," the EFC said in its recommendations.

"These are weaknesses which must be addressed as a matter of priority," the EFC added.

Financial integration in the EU has made it easier for a crisis in a cross-border bank to spread more quickly. There are now 46 cross-border banking groups in the bloc, 21 of which have significant operations outside their home country, the EFC said.

The new blueprint for handling financial crises will be formally adopted by EU finance ministers in October and implemented over the next two years.

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