* Diplomats back law to challenge power of debt raters
* Draft EU rules propose "unlimited liability" for agencies
BRUSSELS, May 21 European Union countries agreed on Monday to press for new controls on credit ratings agencies, with a law to challenge the power of the debt raters whose downgrades of countries angered politicians as they struggle with an economic crisis.
The draft rules, which will turn into EU law after the completion of negotiations with the European Parliament, could make it easier to sue ratings agencies if they were seen to make errors when ranking the creditworthiness of debt.
Diplomats from EU countries gave their broad backing to a draft law that will clamp down on the agencies, who had come under fire for giving top-notch AAA credit scores to debt that unravelled in the financial crisis.
The deal, which some countries including France had hoped would be stricter, injects fresh momentum into a regulatory drive to change the way the big three credit rating agencies - Fitch, Moody's, and Standard & Poor's - work.
It means country ratings may have to be reviewed every six months, rather than once a year, as is often now the case.
One of the strongest proposed reforms imposes legal liability on rating agencies for their decisions although it is not clear how this would be enforced.
"The possibility to claim damages for an infringement of the (EU) rules ... should be available for all," the draft law says.
"It is only appropriate to expose credit rating agencies to potentially unlimited liability where they breach the regulation intentionally or with gross negligence."
An earlier proposal by the European Commission to force debt issuers, such as companies, to rotate the ratings agency they use to rank their bonds has been watered down. It will now only apply to resecuritised debt, a market that officials from the EU's executive admit is largely dead. (Reporting By John O'Donnell; Editing by Dan Lalor)
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