French President Nicolas Sarkozy's office has confirmed that he and German Chancellor Angela Merkel will hold a conference call with Greek Prime Minister George Papandreou tomorrow evening.

"The teleconference was decided in view of the upcoming EU meeting in Poland," a Greek official said, referring to the informal talks between EU and euro zone finance ministers and central bankers in Wroclaw on September 16-17.

The meeting is being held with markets in turmoil on rising fears of the insolvency of Greece or even an exit from the euro zone, stemming from its ongoing troubles to apply an EU-IMF recovery plan.

Athens has been warned that failure to overhaul its economy could cost vital funds out of an €110 billion EU-IMF bailout that rescued it from bankruptcy last year.

A new €159 billion lifeline from the EU currently hangs in the balance, with a number of euro zone members expressing frustration with the Greek government's delay in enacting and implementing agreed reforms.

Merkel seeks to ease Greek default fears

German Chancellor Angela Merkel today sought to ease fears over a possible Greek bankruptcy, saying the 17-country euro zone had to stick together and that an "uncontrolled insolvency" must be avoided.

"The top priority is to avoid an uncontrolled insolvency, because that would not just affect Greece, and the danger that it hits everyone - or at least several countries - is very big," Merkel told German radio station RBB.

She stressed that the euro zone had to remain intact, warning that if Greece were to leave the group, others would swiftly follow. "I have made my position very clear that everything must be done to keep the eurozone together politically. Because we would soon have a domino effect," the chancellor said.

She recalled that there is currently no formal procedure in the euro zone for the "orderly default" of a member state but noted the EU's permanent crisis mechanism (ESM) that is due to come into force in 2013 included one.

Merkel also had encouraging words for Greece, which is trying to persuade an international team known as the "troika" that it is getting its public finances back on track - a prerequisite for more aid.

"Everything I hear from Greece is that the Greek government has hopefully seen the writing on the wall and is now doing some of the things that are required," she said. She said she was in "direct contact with the Greek authorities" and added: "We are making it very clear through these channels how serious the situation is."

French Prime Minister Francois Fillon had similarly soothing words for Athens, saying last night there "was no doubt" over France's commitment to "protect the euro zone."

"This solidarity should not and will not be broken," he told a conference in Paris.

In a bid to calm markets, which went into free-fall yesterday after comments from German policymakers that an orderly insolvency for Greece or even a euro zone exit was possible, Merkel urged officials to choose their words cautiously.

"Everyone should weigh their words very carefully. What we do not need is volatility on the financial markets. The uncertainties are already big enough," said Merkel.

Merkel's comments were seen as a rebuke to German Economy Minister Philipp Roesler who said in an opinion article yesterday that Europe could no longer rule out an "orderly default" for Greece.

After falling yesterday, partly on the back of Roesler's comments, the euro stabilised somewhat but markets remained risk averse amid continued worries over Greece.

The chancellor also said she was confident she would secure the necessary parliamentary majority in a crunch vote later this month on expanding the EU's rescue fund, despite the threat of a backbench rebellion in her coalition.

The vote, expected on September 29, will be watched closely in the financial markets, which are nervously looking for any sign that Germany, Europe's top economy and paymaster, is wavering in its commitment to the euro.

Despite Merkel's insistence that the euro zone will stay together, however, the influential Bild daily reported that fears were growing in the coalition that Greece would eventually have to leave the currency zone.

"A Greek euro exit is seen as possible as soon as next spring," wrote Bild, citing sources within the ruling coalition.

US working with European states on crisis - Obama

US President Barack Obama warned overnight that the world economy would remain weak until the euro zone crisis was solved. Obama said that the US was working with European states and authorities to help craft packages for vulnerable economies.

"We will continue to see weaknesses in the world economy, I think, so long as this issue is not resolved," Obama said. "It will be a significant topic for the G20 meeting that takes place in November," he said, referring to a meeting to be hosted by France.

Obama said that Washington was "deeply engaged" with European nations on solving the euro zone crisis but that ultimately large countries in Europe were going to have to come together to decide how to solve it.

"Greece is obviously the biggest immediate problem. And they're taking some steps to slow the crisis but not solve the crisis," Obama said.

"The bigger problem is what happens in Spain and Italy if the markets keep making a run at those very big countries," he added.

Following a G7 policymakers' meeting which agreed little at the weekend, US Treasury Secretary Timothy Geithner is due to make an unprecedented one-day trip to Poland this week to meet euro zone finance ministers.

