Political turmoil in Portugal and looming elections in other countries are expected to prevent a summit of European Union leaders this week from taking tough decisions to address the region's debt crisis.

For months, EU leaders have talked about using the summit in Brussels on Thursday and Friday to reach final agreement on a comprehensive package of steps that would stop the crisis from spreading further through the 17-country euro zone.

But Portuguese Prime Minister Jose Socrates submitted his resignation on Wednesday night after parliament rejected his government's latest austerity measures, which were designed to help Portugal avoid having to seek an international bailout.

Socrates is now expected to attend the summit as the leader of a caretaker government which may last no longer than Friday. Major decisions affecting the euro zone have to be agreed by all members of the zone; Portugal may only be able to give its assent after it forms a new government, which could take two months.

Finland has dissolved its parliament ahead of elections on April 17 and cannot take any formal decisions until it has a new government, which is only likely by May at the earliest. The new government may include the euroskeptic True Finns party, which opposes some of the EU's proposed crisis steps.

And an opinion poll published on Wednesday showed support for German Chancellor Angela Merkel's conservatives dropping sharply across the country before an election this Sunday in the important state of Baden-Wuerttemberg.

The approach of the election has contributed to a hardening of Germany's stance on new measures to aid indebted euro zone countries ahead of the summit.

FADING HOPES

Fading hopes for a breakthrough at the summit, combined with concern over the possibility of a bailout for Portugal, pushed the euro down moderately on Wednesday, while government bond yields for weaker euro zone states rose.

Over the last few months, EU leaders have made considerable progress in putting together the crisis package. They have decided in principle to expand the lending capacity of the European Financial Stability Facility, the euro zone's bailout fund, from 250 billion euros to its full size of 440 billion.

But they have so far been unable to agree on exactly how the EFSF's capacity will be increased. And although they have decided to create a permanent bailout fund to replace the EFSF in 2013, the 500 billion euro European Stability Mechanism, there are doubts about how to achieve this too.

A German official said on Wednesday that Germany now wanted this week's summit to alter a timetable agreed by EU finance ministers on Monday for injecting cash into the ESM.

While this is essentially a technical issue, it contributes to a sense in financial markets that EU member states are endlessly at odds over how best to handle the debt crisis, and that everything could unravel if deals are not respected.

Draft conclusions prepared for the summit, seen by Reuters on Wednesday, suggested that final decisions on how to strengthen the EFSF and establish the ESM might only be taken by the EU shortly before a deadline at the end of June.

NO MOVE ON IRELAND

The summit also looks unlikely to make progress on reducing the interest rate on bailout loans which have been extended to Ireland.

Dublin says the rate is so high that it cripples the Irish economy, but agreement on cutting it has been held up by Dublin's refusal to give in to German and French pressure for Ireland to raise its corporate tax rate in line with the rest of Europe.

There is almost certainly not going to be a resolution of the Irish issues tomorrow or Friday, an EU diplomat said on Wednesday.

The feeling is that the outstanding issues for Ireland, which are not just the interest rate but the banking question, that they are better dealt with as a package.

Ireland and the EU are only expected to start detailed talks on how to rescue the Irish banking system after Dublin's central bank publishes its assessment of Irish commercial banks on March 31.

(Reporting by Julien Toyer, Jan Strupczewski, John O'Donnell, and Luke Baker in Brussels, Stephen Brown in Berlin and Axel Bugge in Lisbon; Writing by Andrew Torchia; Editing by Jodie Ginsberg)

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