At a regular meeting in Luxembourg, the finance ministers of the EU's 27 member states agreed in principle that their countries should each, as a minimum, guarantee private bank deposits to a level of "at least" 50,000 euros ($67,500) "for at least one year," diplomats said.

The minimum deposit guarantee currently stands at 20,000 euros.

However, individual member states are free to set higher figures, the ministers agreed, acknowledging that "many member states are determined" to raise the limit to 100,000 euros.

The political agreement will only become law once the EU's executive, the European Commission, makes a binding legal proposal which member states formally approve.

"We have agreed to support systemic financial institutions," deputy German Finance Minister Joerg Asmussen told reporters after the Luxembourg talks.

EU markets continue spiral

Bad financial news continued to pile up in Europe despite the last-minute rescue late Sunday of one of Germany's most important banking institutions, commercial property lender Hypo Real Estate.

Markets in Frankfurt, London and Paris continued their downward spiral on Tuesday with investors continuing to worry over the strength of financial institutions.

Frankfurt stocks fell back into the red midmorning on Tuesday as a rebound from steep losses on Monday ran out of steam amid fresh worries that German banks would fall victim to the financial crisis. On Monday, the DAX plunged more than seven percent in line with markets around the world.

London's FTSE 100 surrendered early gains as banking shares took a hammering. The Royal Bank of Scotland was the biggest loser, with its shares down more than 30 percent to a 13-year low. France's Cac-40 index also followed the same trend.

Japan's Nikkei 225 index sank more than 5 percent -- below the 10,000-point barrier -- before recovering slightly to close down 3 percent. However Australia's financial markets rallied after the country's central bank cut its official interest rate from 7 percent to 6 percent.

Iceland passes emergency powers over banks

Iceland agreed to adopt sweeping powers over banks as its currency plunged 30 percent and a leading agency cut its credit ratings.

On Tuesday, financial authorities took over the country's second largest bank, Landesbanki in a bid to stave off national bankruptcy after its banks took on massive debts in expanding overseas.

"As declared by the government, all domestic deposits are fully guaranteed. Landsbanki's domestic branches, call centers.cash machines (ATMs) and Internet operations will be open for business as usual," the Icelandic Financial Supervisory Authority said in a statement.

EU criticized for piecemeal response

The EU has been criticised for its fragmented response to the crisis and the way individual countries have broken ranks with deposit guarantees.

"We need to find a common solution as one country's solution may be another country's problem," said Swedish Finance Minister Anders Borg.

But German Chancellor Angel Merkel continued to oppose a European fund to rescue struggling banks, saying that each country needed to "face up to its own responsibility."

Merkel pointed out that the government stepped in this weekend with a massive 50-billion-euro ($68-billion) bailout of Hypo Real Estate, the country's fourth-largest bank.

But Germany wants to avoid being stuck with a massive bill for the bailout of other countries' failed financial institutions. Instead, Merkel continues to call for tighter market controls over the banking sector.

A common pledge

While there is no agreement on a bailout, European leaders vowed they would "continue to take the necessary measures to protect both the system and individual depositors,” according to a joint statement read Monday by French President Nicolas Sarkozy, who holds the EU's rotating presidency.

"European leaders acknowledge the need for close coordination and cooperation," Sarkozy said.

EU countries have not found common ground on whether to guarantee all money in bank deposits.

Ireland and Greece moved last week to pass a law which guaranteed all bank deposits. While Germany initially opposed the idea, it seemed poised to change course Sunday when Merkel offered a "political pledge" guaranteeing money in German banks.

Denmark, Portugal and Iceland guaranteed deposits Monday and Austria, Britain, Denmark, France, Portugal, Sweden have announced similar plans are under discussion.

Merkel promises clarification

Merkel's assurance Sunday that all deposits in German banks are secure has not been followed up with specific policy proposals on how the estimated 1 trillion euros ($1.4 trillion) in savings accounts would be protected. Merkel is scheduled address the issue when she speaks to parliament Tuesday afternoon.

A clarification is "urgently needed," said Guido Westerwelle, head of the Free Democratic Party, a free-market liberal party.

Politicians say they want clarification about the government's weekend bailout of Hypo Real Estate as well as the savings issue.