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NEW YORK, June 6 (Reuters) - European leaders can still contain the region's debt crisis and protect weaker economies from contagion should Greece default again, but time is running out, Standard & Poor's analysts told Reuters on Wed nesday.
Policymakers in the euro zone need to make swift decisions about moving to a fiscal union and solving the region's banking crisis, which has already caused S&P to slash Spain's sovereign rating by two notches in April.
The 17-nation bloc has shown promising hints of moving toward stronger fiscal ties, with Spanish Prime Minister Mariano Rajoy recently backing the creation of a new euro-wide fiscal authority.
It has been "encouraging to see lately some signs the policymakers seem to be willing to put together and articulate a long-term plan and vision for how Europe will more fully integrate," Curt Moulton, S&P's global head of sovereign ratings, said in a telephone interview.
"The risks... are they take too long to develop a plan and their decisions are too incremental as they go along."
Policymakers need to adjust competitive imbalances, move to a more effective fiscal union and develop a continent-wide solution to the banking sector, as well as put structural reforms in place to boost growth, Moulton said.
"Decisive action on all of those things would obviously shorten the crisis and speed the recovery," he said.
European leaders can also protect some of the region's weaker economies should Greece default again, said John Chambers, the chairman of S&P's sovereign rating committee.
"We think that with a robust policy response by the Europeans, that they can insulate some of their governments that are currently getting official assistance from some of the fallout" if Greece defaults, Chambers said in the interview.
But that might take an increase in the resources of the euro zone's permanent rescue fund, the European Stability Mechanism, he added.
The 500-billion-euro European Stability Mechanism is due to take force next month.
Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks, although Madrid has not yet requested assistance and is resisting being placed under international supervision, European sources said on Wed nesday.
The monetary union has faced increased pressure for financial integration from the United States, as well, to prevent the region's debt crisis from derailing still-fragile recoveries around the world.
While Germany in the past has voiced concerns about such a fiscal union, sources familiar with discussions in Berlin and Brussels said intensive contingency planning was already under way for EU aid to Spain.
Spain's borrowing costs are hovering near 6 percent, a level many consider unsustainable, and Italy's borrowing costs are not far behind.
Investors have dumped riskier assets around the world, flocking to the safe havens of U.S. and German debt and the dollar, on worries the debt crisis will hobble global economic growth for years.
Europe has little time to spare on these decisions, Chambers said.
"I think we're getting close to that abyss," he said. (Reporting by Luciana Lopez, Editing by Gary Crosse and Dan Grebler)