Diplomats say EU leaders have agreed in principle that limited changes are needed to the EU's treaty to accommodate Germany's call for the creation of a permanent system to handle debt crises.

According to reports from the summit in Brussels, the leaders have agreed that a limited treaty change should be made and are working on the exact wording of the mandate for European Council President Herman Van Rompuy to prepare such changes.

The diplomats said the mandate from the leaders would be in the form of a short text and would underline the need for the European Commission to be involved in the preparatory work.

Earlier, German Chancellor Angela Merkel stood firm on controversial demands to rewrite the treaty to help rescue nations in financial distress while stripping deficit offenders of voting rights.

'We in Germany believe that to do this we need a modification of the treaties on how to respond in the future to crises that endanger the euro,' she said as went into the two-day summit.

Taoiseach Brian Cowen said the Government acknowledged that a permanent crisis mechanism was needed to deal with countries suffering a Greek style debt crisis, but he said any treaty change should be as narrowly focused as possible.

But Mr Cowen said that the possibility of suspending the voting rights of a country which breached deficit and debt rules was a 'non-runner'.

Chancellor Merkel also said banks that lend money to states by buying their bonds should also be asked to put money in the rescue fund. 'Taxpayers should not be the only ones to shoulder the responsibility,' she said. She also reiterated a call to strip countries that breached deficit rules of their EU voting rights.

A proposal last week by Merkel and French President Nicolas Sarkozy to redraw the Lisbon Treaty in the interests of tighter budgetary discipline triggered worries across the EU about a repeat of the fractious decade-long negotiations that brought it into being.

But ahead of the summit, a compromise seemed in the offing in the shape of a light tweaking of the treaty over the next couple of years. Germany says it needs the treaty amended to counter domestic political obstacles.

Concerns about another referendum

The Taoiseach was speaking after a meeting of European liberal prime ministers in advance of the two-day EU summit.

Mr Cowen said concerns about re-opening the Lisbon treaty to the point where a referendum might be required would cause concern. But he said that those concerns were not confined to Ireland.

On the subject of the four-year Budget, Mr Cowen was asked if there was any possibility of delaying the four-year budgetary plan and bringing forward the December 7 budget.

'We are working away on both matters. The Cabinet is meeting regularly, we have set target dates to indicate the timing of the budget plans, and we are working to those schedules. If the schedules change we'll let you know,' the Taoiseach said.