By John O'Donnell

BRUSSELS (Reuters) - Europe moved closer to ending banking secrecy on Wednesday after Austria dropped objections to sharing data on foreign depositors and the EU focused on negotiating a similar agreement with Switzerland.

"It's a bad day for tax cheats," Austrian Chancellor Werner Faymann told reporters at a meeting of EU leaders to discuss fighting tax fraud. "We will act jointly and I believe we will manage the exchange of data by the end of the year."

Nearly all EU member states exchange information about which bank account holders receive what interest payments - an agreement known as the Savings Directive.

Luxembourg and Austria had not wanted to reveal the names of account holders to other countries and instead allow banks to withhold tax, but under pressure from their European partners both have now agreed to sign up to the code.

"The wording we have now is good," Faymann said, referring to an EU agreement on bank information exchange to be discussed at the summit. "I can agree with that and it's an important step for Europe."

German Chancellor Angela Merkel described the deal as an 'enormous step'. "There will finally be an exchange of necessary tax information in the European Union," she said.

Most developed countries share information on taxpayers and depositors "on demand". But since this requires the authorities in the requesting jurisdiction to suspect wrongdoing, it has only limited impact in uncovering unlawful behavior.

Luxembourg, whose banking system holds deposits many times the size of its economy, has said it will exchange information from 2015 but first wants a similar agreement with neighboring Switzerland, the globe's biggest offshore center with $2 trillion of offshore assets.

"Luxembourg is ready to automatically exchange information from January 2015 as long as the European Union goes ahead with its negotiations with Switzerland and other countries," Luxembourg's Prime Minister Jean-Claude Juncker said.

Automatic exchange of information makes it easier for tax authorities to spot tax evasion or illicit money flows.

As well as negotiating with Switzerland to bring it into the same regime as the EU's 27 member states, the EU also plans to negotiate with Liechtenstein, Monaco, Andorra and San Marino, small states with banking secrecy regimes, to try to close off all potential loopholes in Europe.

(Reporting By John O'Donnell and Robert-Jan Bartunek; editing by Rex Merrifield and Ruth Pitchford)