Media playback is unsupported on your device Media caption Angela Merkel says that Europe's 'golden rule' must be debt reduction.

The French and German leaders have called for "true economic governance" for the eurozone in response to the euro debt crisis.

Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone.

Ms Merkel said that further integration would be a "step-by-step" process.

They also advocated a tax on financial transactions to raise more revenues.

Negative reaction

The two leaders said they wanted bi-annual meetings of the 17 heads of the eurozone governments, chaired by Herman van Rompuy, the current president of the European Council.

Markets reacted negatively to the conference, with some investors saying that they were expecting bigger announcements.

Analysis The euro crisis underlines just how difficult it is for countries to share a currency if they don't have integrated government finances. The proposals set out by the two leaders would be a small step along the road towards that. The eurozone economic government they propose would be led by heads of state and government and would meet at least twice a year. But it is not clear just what powers they have in mind for it. President Sarkozy and Chancellor Merkel also called for new laws by next year in all euro countries requiring balanced government budgets. And they said they will propose a common Franco-German approach to business taxation, as an example for others of closer cooperation. These are relatively small steps towards greater integration, but they nonetheless have some bearing on the long term problems afflicting the eurozone. But they are unlikely to do much to alleviate the immediate crisis. Financial markets would have been more impressed by a commitment to increase the resources available for bailouts or a plan for shared government debts, an idea being called eurobonds. What the eurozone needs perhaps more than anything is stronger economic growth to generate more tax revenue and reduce government borrowing. The latest figures show the opposite. Sharp slowdown in German growth Soros calls for joint euro debts

In New York, the Dow Jones Industrial Average fell 1.3% during and after the press conference, which took place after the close of trading in Europe, but recovered later.

Government bonds in the US and Germany - seen as safe havens in any economic downturn - rallied in reaction to the leaders' comments.

Ms Merkel again played down the chances of introducing "eurobonds" - jointly guaranteed debts of the 17 eurozone governments - as a solution to the crisis.

The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order.

But the German chancellor said she only saw such a move coming at the end of a long process of fiscal union.

Growth fears

Instead, Ms Merkel proposed that a requirement for eurozone members to balance their budgets should be enshrined in each of their constitutions.

"We will regain the lost confidence," she said. "That is why we go into a phase with a new quality of co-operation within the eurozone."

In another initiative to increase tax revenues, the leaders advocated harmonising corporate tax rates across the single currency - something likely to be strongly opposed by the low-tax Republic of Ireland.

However, Germany's insistence on government austerity across the eurozone has been criticised by some economists for undermining the economic recovery.

The two leaders were meeting in Paris in the wake of last week's turmoil on the financial markets, which came amid fears of a renewed global recession and over the ability of Spain and Italy to repay their debts.

Earlier on Tuesday, Germany revealed that its economy grew by just 0.1% in the three months to June, much more weakly than previously thought.

Germany had been driving the economic recovery in the eurozone.

There is no serious momentum in economic activity that gives endless time to the leaders of the eurozone to agree measures that will provide reassurance to creditors and investors that Spain and Italy will ultimately be able to pay all their debts Read Robert's blog in full

Both French and German leaders, along with the European Central Bank, are putting pressure on so-called peripheral economies to extend austerity measures to try to balance their budgets.

Major economies are also making cuts - Italy announced tougher austerity measures designed to reduce its budget deficit on Friday, while Spain has also said it will speed up spending cuts.

However, there are fears that spending cuts by governments - something strongly advocated by Germany - will undermine overall economic growth.

In an article published in the Financial Times newspaper, the head of the International Monetary Fund, Christine Lagarde, warned governments that they must balance spending cuts with measures to support growth to avoid the risk of a double-dip recession.

Ms Lagarde acknowledged the need for governments to reduce debt levels, but said "slamming on the brakes too quickly would hurt the recovery and worsen job prospects".

It could also undermine further the confidence of international investors, she said.