(Reuters) - The European Union was poised to approve an 85 billion euro ($115 billion) rescue for Ireland on Sunday and announce outlines of a permanent system to resolve Europe's spreading debt crisis, a euro zone source said.

Finance ministers from the 16-nation euro zone, anxious to prevent financial market contagion from engulfing Portugal and Spain, met to endorse an emergency loan package to help Dublin cover bad bank debts and bridge a massive budget deficit.

A German government source said the ministers were also discussing Portugal and its possible need of an EU bailout.

Under pressure to take dramatic action to arrest a systemic threat to the euro, the leaders of Germany and France, the EU's two central powers, agreed in principle with top EU officials on the broad lines of a permanent crisis-resolution mechanism.

Crucially, private bond holders would be expected to share the burden of any future sovereign debt restructuring of a euro zone country on a case-by-case basis, the source said.

The heads of the European Commission, the European Central Bank, the European Council and euro zone finance ministers discussed the Franco-German proposal by telephone on Sunday.

All 27 EU finance ministers were expected to endorse the broad outlines of the longer-term plan before markets open in Asia on Monday, the source said.

"You know that we have a very serious situation, we have to do our utmost to protect the foundations of our economic recovery," EU Monetary Affairs Commissioner Olli Rehn told reporters on arrival for the Brussels talks.

He said ministers would go beyond endorsing the EU/IMF aid package for Ireland and "discuss the systemic response to this crisis." But it was unclear how much detail would be announced about a long-term financial safety net.

The lack of detail in an earlier Franco-German deal on a permanent crisis mechanism, agreed last month, and talk of private investors having to take losses, or "haircuts," on the value of sovereign bonds, helped drive Ireland over the cliff.

EU sources said a team of specialists from the Commission, the ECB and the International Monetary Fund had finalized a deal with Irish authorities in Dublin after 10 days of negotiations.

However, some key details, notably the interest rate and the term of the loans, expected to be between three and six years, would be finalized by ministers. French Economy Minister Christine Lagarde said the loans would total 85 billion euros.

"The assistance to Ireland is nearly done," she told reporters. "We just have a little fine-tuning to be done, notably on interest rates."

The EU sources said 35 billion euros was earmarked to help restructure and recapitalize Ireland's shattered banks while 50 billion euros would go to help fill the hole that guaranteeing bank debts has blown in public finances.

CONVINCE MARKETS

With anxiety rattling bond markets, the Irish government has been under intense pressure to accept a bailout despite repeatedly saying in recent weeks that it did not need one.

European leaders are hoping that the package for Ireland, drawn from a 750 billion euro rescue fund agreed by the EU in May this year, will convince markets that the crisis can be contained and spare Portugal and Spain -- the next two countries identified as potentially at risk.

"We have to make decisions which show that in the future, we are capable of resisting where there are shocks and turbulence," Belgian Finance Minister Didier Reynders told reporters.

Debt worries have driven the crisis for the past year almost without respite. It has severely dented confidence in the 12-year-old euro currency and produced what amounts to a showdown between European politicians and financial markets.

In a flurry of phone calls over the weekend, French President Nicolas Sarkozy spoke with German Chancellor Angela Merkel and the leaders ofItaly, Spain and Portugal.

Tens of thousands of Irish took to the streets of Dublin on Saturday to protest the looming bailout, and Irish opposition parties said they would not accept excessive rates of interest.

The parties, Fine Gael and Labour, are expected to rout unpopular Prime Minister Brian Cowen's Fianna Fail party in an election likely within months. They have said they would be bound by a rescue deal but may try to renegotiate details.

Both parties want bond investors who lent money to Irish banks to take on a bigger share of their country's bailout burden, rather than foisting it all on Irish taxpayers.

Jitters sent the shares of European banks which hold the debt of Irish banks tumbling on Friday. The euro also fell to a two-month low against the dollar and the borrowing costs of Ireland,Portugal and Spain stood near record highs.

PORTUGAL AND SPAIN

European officials have been at pains to play down the links between Ireland and Portugal, widely seen as the next euro zone "domino" at risk. Troubles in Portugal could spread quickly to its larger neighbor Spain because of their close economic ties.

Unlike the other financially weak countries on the euro zone's southern periphery, Spain is on track to meet its deficit reduction targets and Prime Minister Jose Luis Rodriguez Zapatero has ruled out seeking aid.

Nevertheless, the government in Madrid has taken several steps to reassure markets about its finances in recent days, announcing that it will publish monthly updates on its public debt and move more quickly to reform the pension system.

Greece, which secured a 110 billion euro rescue half a year ago, is struggling to meet its deficit targets. Local newspaper Realnews quoted a senior IMF official on Saturday as saying the country's loan repayment period could be extended by five years to make it easier to service its debt.

Such a move could meet strong public resistance in countries like Germany, which as Europe's largest economy is shouldering the biggest share of the rescues.

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