Under a framework agreement announced at 4 a.m. in Brussels after 10 hours of talks, the European Central Bank would be put in charge of supervising all 6,000 banks in the euro zone under a new regime to be fully operational by Jan. 1, 2014.

In a concession to Germany, leaders also agreed that much of the day-to-day supervision of smaller banks would remain in the hands of national regulators.

"The urgent element now is setting up a single supervisory mechanism to prevent banking risks and cross-border contagion from emerging, and that's why the European Council called tonight for swift progress, with the objective of agreeing on the legislative framework by January 1, 2013," EU Council President Herman van Rompuy told journalists in Brussels.

"Once this is agreed, the single supervisory mechanism could probably be effectively operational in the course of 2013."

The new system is aimed at breaking the link between banks and governments that sparked the region's current crisis. It would pave the way for direct recapitalization of lenders -- starting with Spain -- from Europe's new €500 billion ($652 billion) permanent bailout fund, known as the European Stability Mechanism.

However, leaders failed to tackle the issue of how direct capitalization would work and when it would start, and what to do with "legacy assets" of lenders already being bailed out by their governments -- raising large question marks over the entire plan.

"The integration pace remains slow," Carsten Brzeski, a senior economist with ING Belgium SA/NV in Brussels, said. "Last night's marathon session again illustrated how cumbersome and difficult the European decision-making process is," he said, adding that direct bank recapitalization looks "very unlikely" anytime soon.

Adding to doubts about the way forward, German Chancellor Angela Merkel warned at the end of the summit that "there are complicated questions to clarify and we'll see in December if we complete it or not."

EU finance ministers are to take up the issue when they next meet on Nov. 12.

"The single supervisory mechanism is a first but essential step toward an integrated framework for financial services," Guido Ravoet, chief executive of the Brussels-based European Banking Federation, said. "But the remaining steps, in terms of arriving at a single resolution mechanism, are just as ambitious and will require just as much commitment."

Friday's agreement came amid more grim news for the euro zone's financial sector, with Moody's Investors Service giving a continued negative outlook for lenders in Germany. It cited several risk factors including "intense" competition, a weak operating environment amid Europe's economic downturn and deteriorating asset quality.

The ratings agency also pointed to uneven profitability across different subsectors. It said savings banks and local cooperative banks are benefiting from their strong retail franchises, while wholesale banking will remain "fiercely" competitive.