Eurozone finance ministers indicated that they were prepared to grant their common bailout fund, the European Financial Stability Facility (EFSF), more resources and greater power to intervene in order to prevent the debt crisis from spreading to major economies such as those of Spain and Italy.

"We are fully aware that Italy and other countries are in the focus of a part of the financial markets and we believe that [our] general statement … is offering an adequate response," Luxembourg Prime Minister and eurozone chairman Jean-Claude Juncker said.

The 17 eurozone members also proposed lowering interest rates and extending the maturity on loans to nations such as Greece.

Although the eurozone nations were meeting in Brussels to discuss the participation of private sector banks and financial institutions in the re-structuring of Greek debt, there was no indication that they had come to a consensus on the issue.

Germany, the Netherlands and Austria have indicated that they are prepared to support a second aid package for Greece, which is expected to total around 110 billion euros ($154 billion), provided that private creditors are willing to voluntarily contribute.

It is unclear, however, whether credit rating agencies would equate private sector participation in a debt-restructuring plan as equivalent to a default.

"There will be no government intervention in the private sector. This would have disastrous consequences," said Austrian Finance Minister Maria Fekter.

The Italian government faces higher borrowing costs

Greek Prime Minister George Papandreou called on the European Union to move decisively and speak with one voice in order to prevent the debt crisis from spreading.

"There is no room for indecision and mistakes … such as allowing cacophony to substitute for a common agenda and create more panic than security," Papandreou said in a letter addressed to Juncker.



"Today, there is a greater need to avoid the mistakes of the past … a strong and visionary European leadership is called for."

Domino effect

As EU finance ministers met in Brussels, concern was spreading that Italy could soon become the latest casualty of the debt crisis.

Italian and other European stocks suffered heavy losses, especially in the banking sector, reflecting worries that Italy's financial stability is at risk.

"Italy has become the new pressure point in Europe's debt crisis," head of sovereign risk at IHS Global Insight consultancy in London Jan Randolf told AFP.

Borrowing rates for Italy and Spain rose to the highest levels since the eurozone was created, and in the case of Spain, to the highest level since 1997. The euro fell sharply against the US dollar as investors lost faith in the single currency.

But politicians were quick to quell rumors that Italy could become the latest country to seek an EU bailout. German Finance Minister Wolfgang Schäuble offered reassurance that the debt crisis had not spread further.

"It is true that Italy has to take difficult budget decisions, but the Italian finance minister has made very convincing proposals and I'm sure they will make the right decisions," he said. "Italy is on the right track."

Rating agencies criticized

Schäuble was among several top European politicians to suggest that rating agencies such as Standard and Poor's, Moody's and Fitch were partly responsible for fueling uncertainty over Italy's financial status. He said that verification was needed "to check if there is abusive behavior" by the agencies.

Germany is among those who favor a second bailout package for Greece

"We need to examine the possibilities of smashing the rating agency oligopoly," Schäuble said.

In response, EU officials in Brussels called for an urgent clampdown on rating agencies, suggesting a ban on ratings for countries covered by international rescue packages such as Greece.

"We must first and foremost be more demanding on ratings of sovereign debts," EU Internal Markets Commissioner Michel Barnier said.

"We see each day the effects on the countries concerned: a hike in the cost of credit, weakened states, possible contagion to other economies."

Author: Spencer Kimball, Charlotte Chelsom-Pill (AFP, dpa, Reuters)

Editor: Nancy Isenson