* EU wants agreement on bank resolution by end-year
* Wants plan on rewarding reforms by December
* Reforms seen key for sustainable growth in Europe
By Jan Strupczewski and Martin Santa
BRUSSELS, Oct 24 (Reuters) - European leaders will confirm on Friday an ambitious timetable for the completion of a banking union, Europe's biggest project since the euro, and set a December deadline for fleshing out the idea of rewards for structural reforms in the euro zone.
Policy-makers believe a banking union in the 18 countries that will share the euro from next year will help increase the flow of credit, boost growth and help prevent financial crises in the future.
Under the union, the European Central Bank will directly supervise the euro zone's 130 biggest banks from November 2014 and have the power to take over supervision of any of the smaller banks if needed.
Such a Single Supervision Mechanism is to be accompanied by a Single Resolution Mechanism (SRM) - a yet-to-be-created euro zone authority with its own fund that would decide how to wind down or restructure banks that are no longer viable.
As an intermediate step towards the SRM, the euro zone wants to agree on a Bank Resolution and Recovery Directive (BRRD), under which national authorities would coordinate their actions to deal with cross-border bank failures.
Euro zone finance ministers have already agreed what this intermediate law should look like, but they now need to reach a deal on the details of the legislation with the European Parliament.
European leaders meeting in the European Council will urge the parliament on Friday to adopt the BRRD and the Deposit Guarantee Directive by the end of the year, draft conclusions of their meeting, seen by Reuters, showed.
The leaders will also set an end-year deadline for euro zone ministers to move on to the next step, by agreeing on how they want the SRM to work, according to the draft conclusions.
That common position on the SRM would also have to go through the European Parliament - and time is short because the last parliamentary session before elections is in mid-April.
The European Council "underlines the commitment to reach a general approach by the Council (of ministers) on the Commission's proposal for a Single Resolution Mechanism by the end of the year in order to allow for its adoption before the end of the current legislative period," the conclusions said.
The European Commission, the EU executive arm, has proposed that it should be the single resolution authority - an idea that Germany opposes.
TESTS, BACKSTOPS, REFORMS AND REWARDS
Meeting all the deadlines appears ambitious, but it would allow the single resolution authority and its fund, which is to be financed from contributions from the banking sector, to become operational in early 2015 - an date favoured by the ECB.
Before the ECB takes over its supervisory duties, it wants to check all the banks' financial health, by estimating the value of their assets under various adverse scenarios.
Because policy-makers expect the ECB check to show that some banks need more capital, EU leaders will reiterate that governments should be prepared to help if a bank cannot raise additional funds from the market.
"Member states should make all appropriate arrangements, including national backstops, applying state aid rules," the draft conclusions said.
EU leaders also want to flesh out in December a plan for euro zone countries to sign contracts with European institutions, promising to bring in reforms to make their economies more stable. Under the scheme, countries would get money if they deliver.
"Work will be carried forward to strengthen economic policy coordination, including by agreeing in December on the main features of contractual arrangements and of associated solidarity mechanisms," the draft conclusions said.
Some policy-makers are sceptical about such contracts, mainly because no money has yet been set aside for "solidarity mechanism".
Cash-strapped governments would be reluctant to create a new fund of a meaningful size on top of their existing commitments to the EU-wide long-term budget.
"These contractual arrangements are extremely unattractive because they are either not possible to finance or they are a bit condescending - it is a bit like telling the kids what to do and then giving them some pocket money," one senior policy-maker said.