EU's Almunia criticises failure to tackle bank-state "doom loop"

* EU competition chief says leaders not delivering on pledge

* Almunia: delay makes it ever harder to end bank-state link

By Foo Yun Chee and John O'Donnell

BRUSSELS, March 8 (Reuters) - European leaders have failed to deliver on a pledge to break the link that can drag banks and governments down together, a top EU official said on Friday, in unusually strong criticism of the region's governments.

Euro zone leaders made the promise at a summit last year at the height of financial market fears that they were losing control of the bloc's debt crisis, which looked likely to suck in bigger economies such as Spain and Italy.

"In June last year, the European Council pledged to bridge the negative loop, the doom loop, between the balance sheets of the banks and the sovereigns," EU Competition Commissioner Joaquin Almunia said, referring to a commitment by leaders. "They are not delivering."

"And every day that this discussion is on the table, the obstacles are bigger than the arguments in favour," he added in comments to a panel discussion in Brussels.

The remarks by the Spanish commissioner underline a growing sense of frustration with perceived inaction by European leaders to address the causes of a banking crisis that was exacerbated by the mutual dependence of governments on banks which bought many of their bonds and had also lent heavily in property booms.

Among them was Ireland, where a government promise to guarantee Irish banks' commitments proved too much to bear and drove it to seek a bailout from European countries and the International Monetary Fund.

Expected to make a full return to market financing soon, Ireland has repeatedly urged euro zone leaders to stick to a deal allowing the bloc's rescue fund to assist its ailing banks, one of the ways to break this link.

Spain's financial sector is also going through restructuring five years after a property bubble crashed, leaving banks deep in bad loans. The Madrid government has nationalised seven banks and borrowed 41.5 billion euros ($54 billion) from its European partners to rebuild weak lenders.

As guardian of EU state aid rules and one of the EU officials with the most awareness of the problems of the region's banks, Almunia has used his power to force the closure of unviable banks and restructuring of some that can be rescued.

"Common instruments and ... mutualisation are at the end of the road that we will walk," Almunia said. "But politically, those who should decide are not yet there."

Breaking the link between banks and their home countries would require a joint approach, across the 17 countries in the euro zone, in tackling troubled banks.

It had been hoped that direct recapitalisation of banks by the European Stability Mechanism, the euro zone's rescue fund, could have this result, but a commitment to this has since been watered down, with countries such as Germany reluctant to be potentially left with the cost of reckless lending in other states, such as Spain.