Chief executives of major banks write to the White House warning that failure to break deadlock would be 'very grave'

Wall Street's stark message to President Barack Obama on Thursday was that failure to end the war between Democrats and Republicans over US debt would smash business confidence, cripple the economy and send financial markets plunging.

Chief executives of all the major banks wrote to the White House warning that a continued deadlock over raising the debt ceiling "would be very grave".

With the 2 August deadline rapidly approaching and a vote in the House of Representatives scheduled on Thursday night, the bankers said they wanted to see "meaningful and concrete steps to put our nation on a sound fiscal footing".

The warning from Wall Street came amid renewed concerns over the fate of the eurozone, with bond yields in Italy and Spain back to the levels seen before the debt package for struggling members of the single currency was agreed a week ago and Cyprus starting to look like the next country in need of a bailout.

Signed by Jamie Dimon of JP Morgan, Lloyd Blankfein of Goldman Sachs and Vikram Pandit of Citigroup, the letter said: "Our economic recovery remains very fragile. A default on our obligations, or a downgrade on America's credit rating, would be a tremendous blow to investor confidence – raising interest rates for everyone who borrows, undermining the value of the dollar and roiling stock and bond markets – and, therefore, dramatically worsening our nation's already difficult economic circumstances."

The letter, from the non-partisan Financial Services Forum, urged policymakers in Washington to come up with a credible plan that would entail tough budget decisions but create the right environment for growth and jobs.

A similar message was sent by the tough-talking German finance minister Wolfgang Schäuble, echoing the warning handed out to Europe this month by the US treasury secretary, Tim Geithner.

Schäuble said: "Everyone in the US should be aware of their responsibility for the global financial markets."

While expressing confidence that a solution would be found, he stressed that a deal between the White House and Congress would not solve all America's problems. "The core of those difficulties is exorbitant debt and the economic prospects. Americans have to find long-term solutions to create solid fiscal and growth policies," he said.

Gary Jenkins of the brokers Evolution Securities was also concerned that the US was flirting with a downgrade, although he said that rating agencies could be placated by a credible, long-term fiscal plan to tackle American debt.

"On the current proposals, a downgrade is still likely, in my opinion, but at this stage of more concern is the possibility that they don't even raise the debt ceiling. Surely they couldn't be that stupid?" Jenkins wrote in a research note.

Danny Gabay of Fathom Consulting said the fate of the world economy hung on Washington's decision, and that the failure of talks could lead to a doubling in yields on US treasury bonds from 3% to 6%, which would have knock-on consequences for every other country.

"It would almost certainly lead to a renewed global recession and banking crisis – only this time there would be only one country left to absorb the losses: China," he said.

Early optimism on Wall Street over a package put together by the Republican leader John Boehner fizzled out when hardline conservatives in the party demanded more spending cuts. The Dow finished down 62.44 points at 12,240.11.

The FTSE 100 had finished higher, up 16 points at 5873. However, continental stock markets fell on fears that EU politicians are backing away from offering unstinting support to troubled eurozone countries.

Schäuble promised he would not be writing the European Financial Stability Facility any "blank cheques", which bond investors immediately took as a signal that Germany would resist further bailouts.

Adding to the gloom, he said it would take Greece 10 years to get back on its feet economically.

"The Greeks will surely need a decade to regain competitiveness," he said.

Europe's debt crisis was also in focus after Standard & Poor's downgraded Greece's credit rating. S&P warned that banks holding Greek debt would suffer significant losses via the rescue package announced last week, as it cut the country's rating to CC. It said that the upcoming restructuring of Greek debt was a "distressed exchange" because private creditors will suffer losses if they agree to swap or roll over their loans into new 30-year bonds, and accept a "haircut" on the value of the debt.

S&P added that it will probably assign a "low-speculative-grade rating" to new Greek debt.