European leaders have clearly agreed that the euro zone's rescue fund, the European Stability Mechanism, should be able to directly recapitalize banks once a supervisory mechanism has been put in place, the president of the European Commission said on Wednesday.

"Heads of state and government agreed on 29 June that the future ESM should have the possibility to recapitalize banks directly, once the new supervisory mechanism is in place," Jose Manuel Barroso told journalists, after a meeting with Ireland's Prime Minister, Enda Kenny.

"This was agreed clearly in that meeting."

Last month, the June agreement appeared to unravel when Germany, the Netherlands and Finland laid out the terms under which they would be willing to allow the European Stability Mechanism grant such assistance.

(Reporting By John O'Donnell)