In a major setback to Britain, European Union leaders have come to a provisional agreement to restrict top bankers' bonuses at a year's salary.

It can be increased to two years' salary with explicit shareholder consent. The bloc's governments will now have to approve the deal, although this is considered a mere formality.

The UK was against any curbs on bankers' bonuses, suggesting that the rules would deter talents and hamper development in the financial sector.

London will not be able to veto the latest decision as it comes with the support of a majority vote of the EU member states. The deal underscores the UK's isolation in the 27-member group of nations.

"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said the European Parliament's chief negotiator, Othmar Karas.

"The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs."

Now, banking heads and financial traders can avail themselves of bonuses which could be a number of times their basic pay. This had given rise to widespread public outrage especially after the crises that led to tax payer-funded bailouts.

The new legislation that seeks to standardise the sector across the region comes as the bloc looks to set up a new unified banking regulator with the European Central Bank as the authority.

The agreement sets the stage for Basel III, a wide revamp of the system to avert another crisis in the banking sector. The G20 had earlier intended to bring the new norms into effect in the previous month, but this has been extended till January next year.

"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks. This will ensure that taxpayers across Europe are protected into the future," Michael Noonan, the finance minister of Ireland was quoted by the Guardian as saying.

The Basel III rules will seek to increase the lenders' tier 1 capital ratio, which would help to soften any troubles in the future. When the full plan receives formal approval, the EU banking sector will undergo its biggest overhaul since the financial crisis.