* National supervisors must follow EBA recommendations
* Danske Bank case led to calls for EU supervision overhaul
* EBA reviewing application of anti-money laundering rules (Adds more comments, Latvia ABLV)
By Huw Jones
LONDON, Oct 8 (Reuters) - Denmark's financial watchdog faces an inquiry by the European Union's banking supervisor into how it supervised Danske Bank, which last week said it was being investigated by the U.S. Department of Justice over alleged money laundering.
The European Banking Authority has powers to make recommendations that national supervisors must follow, as it did during a probe into how Malta's supervisor oversaw one of its banks.
"We are doing preliminary breach of union law inquiries on ... the Danske bank case in Denmark," EBA Chair Andrea Enria told the European Parliament.
He also told parliament on Monday that the EBA is launching a review into how all EU member states apply anti-money laundering rules. It will report by the end of 2018.
Danske Bank's revelation last month that between 2007 and 2015 payments totalling 200 million euros ($230 million) flowed through its tiny Estonian branch, many of which Denmark's largest lender said were "suspicious", has prompted calls for an overhaul of bank supervision in Europe.
The escalation in the Danske Bank case follows an admission in September by Dutch financial services group ING that criminals had been able to use its accounts to launder cash, a lapse which led to a 775 million euro fine.
Enria also said EBA had opened a preliminary inquiry into how Latvia's financial watchdog supervised ABLV bank which went into liquidation this year after U.S. authorities accused it of laundering money for people from the former Soviet Union.
Lawmakers on the European Parliament's economic affairs committee questioned whether EBA was doing enough to combat money-laundering. German lawmaker Wolf Klinz said a standalone anti-money laundering (AML) agency for the EU may be needed.
"In order to contribute to more effective EU wide AML supervision, we urgently need more resources and greater clarity in EBA powers," Enria said.
Criminal money was moving through member states but cooperation between the authorities was not up to speed, Enria said, adding that the European Commission had proposed just 10 extra staff for EBA to help with anti-money laundering work.
"We do have an EU problem. The point is how to fix it," he said, adding that the framework for cooperation with the United States over money laundering issues was not working as well as it should.
In Malta's case, EBA issued recommendations to Malta's financial market watchdog over its handling of Pilatus Bank, whose chairman has been indicted for money laundering.
$1 = 0.8711 euros Reporting by Huw Jones; Writing by Alexander Smith Editing by Adrian Croft and Edmund Blair