* EU leaders work on using proceeds of frozen Russian assets

* Bond issuance idea not getting traction yet - diplomats

* Russia has condemned plan to use assets' profits

(Adds EU diplomats and context throughout, Moscow's reaction paragraph 12; changes slug to EU-SUMMIT/, previous EU-SUMMIT/UKRAINE-CRISIS)

BRUSSELS, March 22 (Reuters) - Belgium would favour using bonds backed by the profits generated by frozen Russian assets to maximise their impact, its prime minister said on Friday, but conceded it had not yet convinced European Union peers.

EU leaders on Thursday agreed to work on a plan - which Moscow said would be theft - that could allow them to use the proceeds from frozen Russian assets to help Ukraine within a few months.

But the idea is quite different from that of using bonds, as member states will work on a proposal that would see the profits channelled to an EU-run fund to buy arms.

Several EU diplomats confirmed the Belgian bond idea - which Bloomberg reported was also being pushed by the United States - had been floated.

But it could struggle to get traction as the European Central Bank, Germany and France expressed their opposition, one diplomat said.

"That's the way to leverage the proceeds that you have today," De Croo said as he arrived at the second day of a summit of EU leaders.

"The proceeds that we have are approximately 3 billion (euros), that's good to use them, but you could also use them to go to the capital markets and use that as a yearly interest payment and then you could leverage it and leverage it and have a much bigger volume," he said.

He added: "I understand that today it is maybe too early to do that. This is something that we as Belgians had designed and that will remain on the table."

An EU diplomat said: "It's a Belgian test balloon ... The Belgians have floated it before, but it hasn't gotten much traction thus far."

According to Bloomberg, citing unnamed sources, Washington has also proposed to G7 allies to create a special purpose vehicle to issue at least $50 billion of bonds backed by the profits of the frozen assets, an idea Germany is not keen on.

KREMLIN WARNING

Under the current EU plan, proceeds from the assets such as interest payments would go to the European Peace Facility, an off-budget fund that provides military aid to countries outside the EU and has been used mainly for Ukraine.

The Kremlin on Friday said Western banks' legal departments understood the "catastrophic consequences" that would follow should the EU proceed with plans to confiscate Russian assets.

The EU could be ready to use the first billion euros of profits on Russian assets for Ukraine as soon as the start of July, European Commission President Ursula von der Leyen said on Thursday.

The EU leaders' desire for urgency to do more to help Ukraine reflects increasing alarm about the war in Ukraine, with Kyiv's ammunition-starved forces struggling to hold back Russian troops and a $60 billion military aid package for Kyiv stuck in the U.S. Congress.

Some 70% of all Russian assets immobilised in the West is held in the Belgian central securities depository Euroclear, which has the equivalent of 190 billion euros worth of various Russian central bank securities and cash.

The proposal is to use profits from the assets held in Europe rather than the assets themselves. (Reporting by Julia Payne, Gabriela Baczynska, Ingrid Melander, John Irish, Jan Strupczewski, writing by Ingrid Melander; Editing by Alison Williams)