Officials at the EU summit in Brussels are trying to clarify comments by German Chancellor Angela Merkel that there would be no retrospective direct recapitalisation of banks by the permanent bailout fund.
Ms Merkel was responding after being asked if her position was defined by a fear of telling German voters about Spain needing further funding before German elections in 2013.
If her comments also applied to Ireland, they would be a setback to the Government's campaign for a deal on legacy debt.
She said: "These ideas are not correct. I hadn't even thought of the elections before hearing such ideas here.
"The capital needs of Spanish banks have just been evaluated and a programme for their recapitalisation has been agreed.
"Spain only needs to ask for the tranches of funds. There will be no retroactive direct recapitalisation, either."
She added: "Once recap will be possible, it will be for needs arising from that point onwards.
At the time when the banking supervision will exist, we won't have problems with Spanish banks any more.
"At least I hope so. I already agreed to a recapitalisation programme for Spanish banks in July 2012.
Nothing could be further from me than these type of thoughts [of elections]."
The Irish Government's strategy has been to try to secure assistance from the ESM, in which the permanent bailout fund would take shareholdings in pillar banks, such as AIB and Bank of Ireland.
Taoiseach Enda Kenny had welcomed the outcome of the summit decision, saying the plan for a Europe-wide banking supervisory mechanism would clear the way for the ESM to recap banks.
The comments this afternoon by Chancellor Merkel have now raised significant questions about whether Germany might block Irish hopes of lowering the burden on taxpayers of legacy banking debt.
In a statement, the Government said the meeting today and yesterday "reaffirmed the commitments made in the Euro Summit Statement of 29 June.
"In that Statement European leaders agreed to enhance Ireland's debt sustainability, and also agreed to break the link between bank and sovereign debt. Those commitments stand.
"We understand that Chancellor Merkel was asked a direct question about the recapitalisation of Spanish banks and she replied in that context.
"We will continue to work with our partners on the implementation of what was agreed in June."
German Finance Minister Wolfgang Schaeuble, along with his Dutch and Finnish colleagues, issued a joint statement in the summer in which they argued that recaps of banks by the ESM should only involve future banking problems.
Fianna Fáil leader Micheál Martin has said Chancellor Merkel's comments are disappointing and bad news for the country.
He accused the Government of misleading the country by overselling the June statement as holding out the hope of retrospective recapitalisation.
He said the Government had not followed up that development in negotiations with other leaders.
Mr Martin said the Taoiseach should now meet Ms Merkel to ascertain Germany's precise position.
Remarks not 'in the spirit' of June agreement - EU source
A well-placed EU source has said Chancellor Merkel's remarks were not "in the spirit" of the June agreement. He said the "spirit and context" of the June deal was very clear.
The source described Chancellor Merkel's remarks as "a bit strange to say the least".
He added: "She's clearly setting out her position."
The source said that a distinction should be made between Ireland, which was explicitly mentioned in the June summit statement, and other countries, such as Spain, which were not mentioned.
The source added that there was "no discussion" at last night's meeting of EU leaders on the question of whether legacy debt would be covered by the ESM, the permanent bailout fund.
EU bank supervision regime agreed
EU leaders meeting in Brussels agreed overnight to form a new EU-wide regime to supervise banking.
The Government hoped this would pave the way for the European Stability Mechanism to directly recapitalise Irish banks.
However, questions remain over when it will take place and what criteria will apply.
The Taoiseach described the outcome of the summit as very positive, adding that solid progress was made.
Mr Kenny said that the summit decision on banking supervision was a clear reaffirmation of commitments made by EU leaders in June, regarding the direct recapitalisation of banks.
He said Minister for Finance Michael Noonan would now be following-up on the agreement with his eurozone colleagues.
Mr Kenny described the overnight agreement as good news for Ireland and Europe.
Germany and France had managed to overcome distinct differences overnight on the bank debt issue to pave the way for the deal.
However, the communiqué on the deal was vague on when the new system would be deemed effectively operational.
It is also unclear what criteria will be used to allow the ESM to recapitalise banks, and whether or not legacy bank debt would be covered.
Only once the new mechanism is deemed effective can the ESM recapitalise banks, which European Central Bank President Mario Draghi said could take at least a couple of months.
EU leaders have established a target of 1 January for the legal architecture to be in place to establish what is called a "single supervisory mechanism".
At some point over the course of next year eurozone finance ministers will work out how the ECB should assume its new supervisory role, how many banks should be supervised, and how non-eurozone countries who want to join the euro will fit in.
"Finance ministers need to decide upon the criteria for the recapitalisation," said European Council President Herman Van Rompuy.
European Commission President José Manuel Barroso said the EU is aware the impact the crisis is having on citizens.
He said: "We are asking our citizens to make major sacrifices.
"We need to provide them with hope, with a realistic prospect that growth will return and that the most vulnerable in society will not suffer."
Speaking on RTÉ's Morning Ireland, Tánaiste Eamon Gilmore said the agreement was "a big step forward".
Mr Gilmore said: "This is something that would have been unthinkable 12 months ago, even six months ago.
"The idea that you would have direct recapitalisation of banks done through the European Stability Mechanism - this was something that was completely out of court, not being considered, couldn't be considered only a very short period of time ago."
Elsewhere, Minister for Social Protection Joan Burton said the job of renegotiating Ireland's bank debt will be a marathon rather than a sprint, but it is proving to be an even longer marathon than she thought.
She said it was important for the future of the eurozone that vibrant economies, such as Ireland, can recover so that the euro and the eurozone could recover.
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