Angela Merkel demanded tougher control over the tax-and-spend policies of Germany's single-currency partners at the start of a make-or-break five days for the euro.

Seeking to halt the single currency's drift towards collapse, the German chancellor finally took decisive action to calm the financial markets when she said it was time to stop talking about a fiscal union and start creating one. Merkel said, however, that negotiations to secure greater centralised control over the budgets of the 17 members of the eurozone could not be rushed and would involve a risky renegotiation of the Lisbon treaty.

Interest rates on Italian and Spanish government borrowing fell sharply and markets rose on hopes that politicians are taking the euro crisis seriously and have woken up to the potential damage that a breakup might inflict. But as Merkel said, the process could take years, and could still be stymied by politicians from any of the 17 eurozone countries wanting to retain control of their budgets.

David Cameron, for whom the talks over closer fiscal union threaten to be politically perilous, was in Paris for talks with the French president, Nicolas Sarkozy. The prime minister, concerned about the impact of a chaotic breakup of the euro on an already fragile UK economy, said he was not opposed to Merkel's plan.

France and Germany will seek to draw up a more detailed blueprint at a summit on Monday after Merkel sketched out her proposal to the Bundestag, while the US treasury secretary, Tim Geithner, will demonstrate Washington's concern over the risk to the global economy posed by the crisis in monetary union when he makes his fourth visit to Europe in six months.

Sarkozy is reluctant to cede too much control over the ability of Paris to set its own budget, and some analysts warned that next week's European heads of government summit in Brussels could end with only the flimsiest of agreements.

Chris Iggo, head of fixed-income investments at AXA, said: "The outcome to the crisis is breakup or makeup. The makeup option involves throwing in the towel on the idea that national sovereignty can be fully preserved in a monetary union."

Merkel is pushing for a new enforceable regime under which countries using the euro would ultimately need to sacrifice budgetary and fiscal powers to a European authority that would monitor and then either endorse or veto budgets. It would penalise those whose debt levels are deemed to be destabilising the currency. She said, however, that there was no quick fix to a crisis that had taken years to develop, and stressed there was no danger for German budgetary sovereignty.

The thrust of Merkel's argument is not so much about settling the immediate crisis, but installing a longer-term system to ensure it can never happen again. The Lisbon treaty would need to be revised to make that possible. But if that proved too difficult, she added in remarks that will resonate in Downing Street, the eurozone leaders could take matters into their own hands outside the EU treaty.

An EU treaty negotiation would present Cameron with the perilous task of trying to prevent a rupture between his pro-European Lib Dem coalition partners and the increasingly impatient Eurosceptic wing of the Conservative party.

Nick Clegg, the deputy prime minister, described Merkel's speech as a welcome development, but in Paris, where he had a 90-minute lunch with Sarkozy to discuss next week's EU summit, Cameron struck a more guarded note. He said the most important thing was for the European Central Bank to take a more robust stance in defence of the euro and for Europe to become more competitive. If there were to be an EU treaty change, his priority would be to "protect and enhance Britain's interests".

No 10 says it accepts that the eurozone needs a "new set of rules" and, with a treaty negotiation looking increasing imminent, Cameron has said his priorities in those talks would include protecting the single market and the City of London and preventing the 17 countries in the eurozone ganging up against the interests of the 10 EU countries who are outside it.

But some Tory MPs want to use any renegotiation to demand a wholesale repatriation of powers from the EU – a position that is unacceptable to the Lib Dems.

Cameron's response has been to stress his commitment to the repatriation of powers in the long term while arguing that, with the euro in crisis, now is not the time for the time for a full-scale renegotiation.

She sought to turn the tide on two years of a collapsing euro by demanding a fiscal union among the 17 single currency countries and insisting on a risky re-negotiation of the EU's Lisbon treaty.

Amid apocalyptic warnings that the decade-old currency was on its last legs, with only days left for Europe's leaders to concoct a response to the sovereign debt crisis that would appease the bond markets, Merkel, however, emphasised that she would not be rushed and that there was no quick fix to a crisis that had taken years to develop.

In a speech to the Bundestag in Berlin, Merkel said the time had come to stop talking about a fiscal union and start creating one. She is to draw up a more detailed blueprint with President Nicolas Sarkozy in Paris on Monday and deliver the new scheme to a crucial EU summit in Brussels next Thursday.

Coming on top of Sarkozy's setpiece speech on Thursday night in Toulon on the future of Europe, Merkel's statement was broadly seen as a signal of Franco-German resolve to get to grips with the crisis after 18 months of persistent failure. It remained to be seen, however, whether the show of Franco-German resolve, with Paris playing second fiddle to Berlin, would suffice to resolve the EU's most debilitating crisis.

On the two key points that would provide instant relief, pushed by France and many others, Merkel remained unmoved. She flatly ruled out the introduction of eurobonds, the issue of common eurozone paper in a pooling of single currency debt that would leave Germany exposed in covering the debts of others and possibly threatening its gold-plated credit rating.

She also opposes a more expansive and activist role for the European Central Bank widely seen as the only EU institution with the firepower required to douse the flames of the euro and sovereign debt crisis. It appeared, however, that she was muting her resistance to an expanded if limited ECB role, clearing the way for central bank and International Monetary Fund interventions that might take the edge off the immediate emergency and provide a breathing space for a more systemic political response.