The euro zone's emergency loan facility should be operational this month, finance ministers said on Monday, expressing hope Slovakia would cease to block the activation of the 440 billion euro ($554 billion) fund.

The special-purpose vehicle, called the European Financial Stability Facility (EFSF), is being set up to provide temporary financing to euro zone countries in trouble and its activation needs the signatures of all 16 countries in the currency area.

Slovakia has refused to sign the EFSF's framework agreement because parties that won elections there in June have been opposed to the mechanism, blocking the whole process.

Officials voiced confidence that after monthly talks among finance ministers from the 16-country euro zone and the wider, 27-country European Union in Brussels on Monday and Tuesday, the Slovaks would subscribe to the EFSF.

I do think that Slovakia will sign up before mid-July. The instrument (EFSF) will be available without any doubt before the end of the month, the chairman of euro zone finance ministers, Jean-Claude Juncker, told reporters before the meeting.

But Slovak Prime Minister Iveta Radicova said after a meeting with EU President Herman Van Rompuy that Slovakia's parliament and cabinet had to be consulted before the country could sign off on the EFSF.

Radicova said the cabinet would meet to discuss the issue on Wednesday and that Slovakia also remained opposed to making a contribution to a 110 billion euro EU bailout fund for Greece.

Pressure on Slovakia to unblock the EFSF is mounting because the fund is a crucial part, together with stress tests of EU banks, of Europe's efforts to restore confidence in financial markets after the Greek debt crisis.

I am very optimistic that the new Slovak finance minister recognizes the seriousness of the situation and a signature will be given in the next hours or days, Austrian Finance Minister Josef Proell said.

And then the vehicle will be fully operational, he said.

STRESS TESTS

While the EFSF seems unlikely to be required to bail out a euro zone government anytime soon, it could come in handy to recapitalize some of Europe's banks after the results of stress tests on lenders are released on July 23.

EU finance ministers join euro zone colleagues on Tuesday and will discuss what information to release from the stress tests of 91 EU banks, or 65 percent of its banking sector.

They will discuss what back-stop mechanisms they can use to recapitalize banks if necessary, as not all countries have, like Spain, dedicated funds for that purpose.

If banks are unable to raise the capital from the markets, governments are to provide the money and if they exhaust their funds, they can turn to the EFSF -- if it is operational.

If it is not, EU countries would still be able to tap a 60 billion euro EU loan facility that is guaranteed by the EU budget, which, unlike the EFSF, is already fully operational.

The euro fell against the dollar on Monday, pulling back from a two-month high as concerns about the results of the stress tests on European banks prompted investors to trim long positions in the single currency.

Some in the market said the euro had been knocked by a German magazine report that the tests would include a haircut on German sovereign debt under certain conditions, countering reports last week that the tests would exempt German haircuts.

Analysts said the efficacy of the tests would depend on how much detail they included, and the possibility the results may be thin on in-depth information was weighing on the euro.

First it is said they (the stress tests) are much too strict, that this is killing the banks. The next day it is said they are too weak and have no effect. The truth is mostly in the middle, German Finance Minister Wolfgang Schaeuble said.

I think the decision to extend the stress-test scenarios and to publish the results ... is an important step to end insecurity on the markets about the situation of the banks in Europe. That is the objective of the exercise. I hope we achieve that, he said before the euro zone ministers' meeting.

To boost market confidence further in EU fiscal policies, the bloc's finance ministers agreed on Monday to start monitoring each others' budget plans from 2011, focus more on reducing debt and broaden sanctions for EU budget rule-breakers.

In a statement after a meeting of the ministers, Van Rompuy, who chaired the talks, said the group also agreed to monitor competitiveness in the EU through a scoreboard of indicators.

Should the indicators fall below certain levels, the ministers would issue policy recommendations under a new procedure for excessive imbalances.

(Reporting by Ecofin team, editing by Dale Hudson)

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