Up to 26 European Union countries will finalise a pact to enforce budget discipline more strictly in the euro zone by March, a top official said on Tuesday, as the bloc tries to move quickly to regain confidence but without Britain's backing.

EU diplomats hope the first draft of a new fiscal treaty for the 17 nations that use the euro and nine other EU countries will be ready next week.

The 'fiscal compact' is meant to allow closer scrutiny of countries' spending in an attempt to stop a similar debt crisis recurring and potentially making it more palatable for the European Central Bank to step up its purchases of distressed euro zone debt to hold down borrowing costs.

All of the 27 EU states apart from Britain agreed at a summit in Brussels last week that they would pursue deeper fiscal integration as part of efforts to tackle the crisis.

They recognise the euro is a common good, Van Rompuy said in a speech to the European Parliament in Strasbourg. Then, early March at the latest, this fiscal compact treaty will be signed, he said.

Several non-euro zone countries, including Sweden, Hungary and the Czech Republic, still need parliamentary approval before they can give their full backing to the move.

Diplomats say this is largely a formality, but euro zone assets have lost ground since the summit, reflecting investor disappointment that leaders failed to agree more immediate steps for tackling the crisis.

The euro zone rescue fund sold 1.97 billion euros (846 million pounds) of three-month bills on Tuesday in an auction that met solid demand as investors sought safety in top-rated short-dated paper.

However, analysts said the threat of a ratings downgrade of euro zone countries meant any attempt by the fund to raise long-term funds could prove much more difficult.

European stocks and the euro inched higher on Tuesday after steep selloffs, but remained vulnerable to further losses with banking stocks in particular heavily exposed through their holdings of euro sovereign debt.

Many of the EU's mechanisms for imposing discipline on profligate debtor countries take effect on Tuesday, but details on how to activate automatic sanctions in the new intergovernmental treaty still need to be decided.

The EU's aim is to have the intergovernmental treaty ratified by all countries, apart from Britain, by June.

The fiscal pact will require national budgets to be balanced, with an annual deficit limit of 0.5 percent of gross domestic product, using a debt break or golden rule enshrined in countries' constitutions to enforce that.

Van Rompuy also said a review of the adequacy of the 500 billion euro ceiling on the euro zone's combined bailout funds will also be completed in March.

BRITAIN FOR DINNER

Britain refused to agree to changes to the EU's Lisbon treaty to push tougher budget rules in the euro zone after it was unable to win special treatment for London's financial services industry.

European Commission President Jose Manuel Barroso told the parliament, meeting in Strasbourg, that any such concessions would have damaged the EU's single market, which aims to guarantee the free movement of people, trade, goods and services.

The United Kingdom, in exchange for giving its agreement, asked for a specific protocol on financial services which, as presented, was a risk to the integrity of the internal market. This made compromise impossible, Barroso said.

Worried about being dictated to by a euro zone moving towards common tax systems and common budgetary control, British Prime Minister David Cameron rejected treaty changes to try to maintain influence, but now appears isolated.

Some believe Britain's decision will reduce its influence in shaping financial regulation because the 26 other states that sign up to a new fiscal regime will meet more regularly and determine the agenda.

While formally Britain will still have on vote on financial regulation, its voice in the discussions deciding the direction of regulation will be weaker than the others, said Sony Kapoor, managing director of Re-Define, an economic think tank.

EU Economic and Monetary Affairs Commissioner Olli Rehn said on Monday he deeply regretted Britain's position, while Cameron was the butt of a string of jokes in the bloc's parliament on Tuesday.

To use a British expression, when you are invited to the table, you are either a guest or you're on the menu, said Guy Verhofstadt, the leader of the alliance of liberals in the parliament, to loud applause.

(Reporting by John O'Donnell, writing by Robin Emmott; Editing by John Stonestreet)