WASHINGTON (Reuters) - Germany is committed to finding a solution to allow the completion of a euro zone banking union by the end of the year, Finance Minister Wolfgang Schaeuble said on Friday.

Schaeuble said he hoped finance ministers would make a decision on plans for the European Central Bank to start supervising the euro zone's banks in the coming week, opening the door to the next step in negotiations on the single resolution mechanism to wind up failing banks.

"We have to find a solution if we want to have a result by Christmas," he told reporters on the sidelines of International Monetary Fund meetings in Washington.

"That is the precondition for coming to an agreement in the current session of the European Parliament, and we are ready to do that."

Analysts say the euro zone badly needs a banking union to restore lending to the economy, regain confidence and boost growth so that struggling economies in the south can repay their debt. Such a union would also help to prevent another sovereign debt crisis.

Germany had insisted the European Union needed to change its Treaty to move the power to unwind or fix struggling banks from a national to a European level, but EU officials told Reuters last month Berlin was working on a compromise that would allow the completion of a banking union without changing existing EU law.

Two senior euro zone officials told Reuters before last month's German election that according to the compromise proposal discussed in Angela Merkel's Chancellery, Berlin could agree to set up a pan-European resolution agency on the basis of article 114 of the EU Treaty.

This legal base had been suggested as sufficient by legal services of the European Commission, the ECB and the council of EU member states. But the agency would only get to decide over the fate of the 130 euro zone banking groups that will be directly supervised by the ECB from the second half of 2014.

That would exclude smaller German savings banks, known as Sparkassen, from the remit of a European - rather than national - agency, officials said.

"There will be no European backstop, but rather national backstops," Schaeuble told reporters on Friday.

Following an inconclusive election result, Merkel's Christian Democrats are having preliminary discussions with the Greens and centre-left Social Democrats, but formal coalition talks have not yet begun and could take several months.

(Reporting by Krista Hughes; Editing by David Brunnstrom)

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