The European Union could be handed powers to change countries' budgets if they breach debt and deficit rules, according to a draft document.

The measures are set to be discussed at the EU summit on Thursday and Friday.

The plan would create a closer fiscal and banking union that would turn Brussels into a finance ministry for all 17 eurozone members.

Fears over the financial health of the single currency grew on Monday after Cyprus became the fifth country to formally request EU aid, Spain asked for external loans to deal with its banking crisis and the new Greek finance minister was forced to step down due to ill health.

Germany has demanded that national budgets be subjected to strict controls as a prerequisite for mutualising debt and issuing eurobonds.

Under the latest plans, the European Commission would reveal detailed adjustments for any country that breaches its commitments. Such changes would be subject to an EU-wide vote.