UPDATE 1-EU bank watchdog examining Danish handling of Danske

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.

"We are doing the preliminary breach of union law inquiries on ... the Danske bank case in Denmark," European Banking Authority Chair Andrea Enria told the European Parliament.

As in a similar EBA probe into how Malta's supervisor oversaw one of its banks, the watchdog has powers to make recommendations that national supervisors must follow.

Enria also told the parliament on Monday that the EBA is launching a review into how all the EU's member states apply anti-money laundering rules and 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.

(With inputs from agencies.)