European leaders backed oversight of hedge funds on Sunday as part of structural reforms they say are needed to help the world's financial institutions emerge stronger from the global economic crisis.

Short-selling by the secretive hedge fund industry -- selling borrowed stock in the anticipation that the prices will fall -- was blamed by some politicians for exacerbating the banking crisis and economic meltdown.

In the United States, regulators will soon launch a series of stress tests to determine which of the U.S. banks should get bigger capital cushions in case of a deeper recession, a person familiar with the plans of President Barack Obama's administration said.

The largest U.S. banks are well capitalized for current conditions, the source said, but the administration wants to ensure they can withstand a more severe economic climate and play a central role in helping restart the flow of credit.

A copy of the summary from the summit hosted by German Chancellor Angela Merkel in Berlin said banks should bring in reforms to ensure they build up a buffer of resources in good times and called for sanctions against tax havens.

Merkel was talking with the leaders of Britain, France, Italy, Spain, the Netherlands, Czech Republic and Luxembourg, as well as the European Commission president, finance ministers and European central bankers.

They were trying to prepare a common stance ahead of a full meeting of the G20 group of leading developed and developing nations in London on April 2.

We have today underscored once again our conviction that all financial markets, products and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile, the summary said.

This is especially true for those private pools of capital, including hedge funds, that may present a systemic risk.

CUT DEFICIT

Since the last G20 in Washington in November, recessions in Europe and the United States have deepened, forcing governments to push through huge stimulus packages that have rekindled fears of protectionism.

After near daily announcements of cash injections to prop up banks, tide over the auto sector and prevent more Americans losing their homes, Obama is already looking at where the U.S. economy will be after any recovery.

He is expected to unveil a plan to cut the ballooning deficit in half by 2013 with a mix of tax increases on wealthier Americans and spending cuts. Private economists project the deficit will rise to $1.5 trillion this year.

We can't generate sustained growth without getting our deficits under control, Obama, due to host a summit on Monday on fiscal responsibility, said in his weekly radio address.

On Thursday I'll release a budget that's sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't and restoring fiscal discipline, he said.

Merkel was also keen to focus on long-term reforms and not see Sunday's meeting hijacked by new problems, such as worries about the fragility of some euro zone nations.

Ahead of the talks, the International Monetary Fund threw its weight behind the idea of a common European bond to alleviate pressure on euro states such as Ireland and Greece that are being forced to pay hefty premiums over stronger bloc members to finance their debt. Germany, Europe's benchmark issuer of debt, has rejected the idea.

CURRENCY SWAPS

Up to 100,000 people marched through Dublin on Saturday to protest at government cutbacks, including a pension levy on public sector workers and freeze their pay, brought in to try to stem a ballooning budget deficit.

Greece is not ruling out tax measures to achieve its fiscal targets, its finance minister said, after the EU started disciplinary action over the budget shortfall exceeding the EU ceiling of 3 percent of gross domestic product.

The commerce minister of Iceland, where the government and the banking system collapsed due to the crisis, told a German newspaper debt would rise to the equivalent of one year's gross domestic product in the near term.

In eastern Europe, the currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions across the region who have borrowed in foreign currencies such as the euro.

Currency concerns were the focus of a meeting of finance officials from Asian countries, heavily dependent on exports, on the Thai island of Phuket on Sunday.

They agreed to expand a currency swap agreement to $120 billion from $80 billion to help bolster currencies that have been battered during the downturn.

The idea is to allow countries hit by short-term liquidity shortages to borrow foreign reserves from other countries to absorb selling pressure on their currencies.

Stock markets plunged worldwide last week, with markets remaining concerned that the slump is continuing to take its toll on banks, despite efforts by many governments to shore up the financial systems.

(Reporting by Reuters bureaux worldwide; Editing by Alison Williams)

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