BERLIN/BRUSSELS (Reuters) - Lawyers for the European Council have expressed doubts about a planned bank resolution fund to wind up or restructure failing banks, as it would not sufficiently protect member states' budget sovereignty, a German newspaper said on Thursday.

The European Council - the body that represents EU member states within the union - doesn't have the power to initiate legislation but has a legal service that examines proposed legislation to see if it is compatible with EU law.

The Commission has an equivalent legal service.

Michel Barnier, the European commissioner in charge of financial regulation, has proposed setting up the bank wind-up agency as part of the bloc's move towards a banking union.

"The proposal does not contain any robust system to guarantee the budget sovereignty of member states," German business daily Handelsblatt cited a report as saying.

European finance ministers will consult on Barnier's proposal for the first time at a meeting in Vilnius on Friday, using the report as the basis for discussion, but no decision is expected, the newspaper said.

The key issue is who has the authority to decide whether a struggling financial institution should be rescued or closed. Barnier wants the Commission to take on this role, while German Finance Minister Wolfgang Schaeuble wants to leave this responsibility to states for the time being.

A senior EU official involved in the preparation of the Eurogroup said: "I cannot confirm that the Council legal services share the view of the German authorities on the legality of the SRM (Single Resolution Mechanism)."

(Reporting by Michelle Martin in Berlin and Jan Strupczewski in Brussels; Editing by David Holmes)

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