By Andreas Rinke

BERLIN (Reuters) - Angela Merkel's conservatives and the Social Democrats (SPD) have struck a deal on the contours of a European banking union under which a body attached to the Ecofin council - not the European Commission - would decide when to close failing banks.

Several sources involved in coalition talks between the parties told Reuters the two camps had also agreed that funds from the European Stability Mechanism (ESM) should not be directly available for winding down financial institutions.

The sources said a number of legal questions still needed to be resolved. But the goal is to sign off on the agreement early next week so that Finance Minister Wolfgang Schaeuble can go to a meeting with his EU colleagues on Thursday with a firm German position on the issue.

The EU wants to agree a deal on bank resolution by year end, but uncertainty over Berlin's stance following an election in September that led to complex coalition talks has sowed doubts about whether it can meet the deadline.

The so-called Single Resolution Mechanism (SRM) is a pillar of a broader banking union that aims to break the "doom loop" between failing banks and sovereign governments - a major problem for the euro zone during its debt crisis.

The compromise stems from a meeting on Thursday evening between Schaeuble, his party colleague Herbert Reul and SPD politicians Peer Steinbrueck, Martin Schulz and Olaf Scholz.

It satisfies a key SPD demand that the ESM not be used to wind down banks while addressing concerns in Merkel's conservative camp about giving the European Commission resolution powers.

The sources said that until a common resolution fund - to be financed by banks themselves - had built up sufficient liquidity, national states would have to shoulder the burden of winding down their own banks.

Should states run into financial problems as a result, they could turn to the ESM for aid, as Spain has done.

The creation of a special body attached to the Ecofin council - the group of 28 EU finance ministers that meet on a monthly basis - would address Schaeuble's concerns about the democratic legitimacy of ceding resolution powers to the Commission.

A simple majority of Ecofin states would be able to decide on the winding down of a bank under the plan, the sources said.

(Reporting by Andreas Rinke and Matthias Sobolewski; Writing by Noah Barkin; editing by Erik Kirschbaum)