EU officials sought to dispel fears about a bank lending freeze on Saturday, despite a stark warning from senior aides that a systemic crisis in sovereign debt now threatened a new credit crunch.

Last week, central banks around the world announced they would work together to offer extra loans in U.S. dollars to banks, a move designed to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis.

European banks are struggling to borrow amid growing alarm about the threat of a Greek debt default among U.S. money market funds and other traditional dollar lenders. European bank stocks have tumbled by a third since July.

But on Saturday, EU officials sought to smooth over the difficulties.

The situation ... is not worrisome, Luxembourg's Finance Minister Luc Frieden said on Saturday ahead of a meeting of finance ministers. All the instruments are in place to make sure the financial system continues to work properly.

Andrea Enria, the head of EU banking watchdog the European Banking Authority, said measures to provide dollar funding to banks had been necessary.

Central banks are doing a lot to provide liquidity, he said.

But behind the closed doors of the meeting, attended by German finance minister Wolfgang Schaeuble, a series of bluntly worded reports prepared by officials told a different story.

SYSTEMIC CRISIS

While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic, officials wrote in the documents obtained by Reuters.

The EU's top finance officials have also urged ministers to reinforce banks' capital while warning that a systemic crisis in sovereign debt is hurting banks and risks a new credit crunch, according to the documents.

The reports, which raise concerns make pointed criticism of some countries for failing to help weak banks, highlight a sense of alarm in European capitals about the financial crisis.

They also show a growing sense of exasperation at the failure of Spain, Germany and others to deal with flagging banks even after their weaknesses were exposed by recent stress tests.

The documents level harsh criticism at countries including Spain for not doing enough to reinforce its banks following dismal results in stress tests and urges action to bolster the balance sheets of weak banks.

Officials highlight the difficulties experienced by European banks in borrowing.

Despite the considerable strengthening of capital positions ... European banks have recently experienced market funding difficulties.

Ministers are also to discuss a tax on financial transactions, such as a levy on trading shares, an idea championed by Germany, France and Austria.

The United States, however, does not intend to introduce such a measure, making it difficult for Europe to go it alone for fear that it could push more trading to New York.

There are very considerable divisions, said Jacek Rostowski, the Polish finance minister who chairs the meeting, commenting on a transaction tax. It obviously raises a lot of emotions.

Germany has said it may pursue a tax solely in the euro zone if countries like Britain refuse to support it but even here, some states such as Italy are skeptical.

(Additional reporting by Robin Emmott, Francesca Landini, Annika Breidthardt, John O'Donnell, Jan Strupczewski, Julien Toyer and Ilona Wissenbach)

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