Germany said on Monday that a summit of EU leaders next Sunday would not produce a miracle cure for the euro zone's sovereign debt crisis, a warning that pushed down markets after a rise in the past week on expectations of a breakthrough.

German Finance Minister Wolfgang Schaeuble told a conference in Duesseldorf that European governments would adopt a five-point plan at the Brussels meeting to address the turmoil that has clouded the outlook for the global economy.

This is expected to include a plan to recapitalize banks and reduce Greece's debt mountain by asking the country's private creditors to accept steeper writedowns on their holdings than the 21 percent losses agreed last July.

But Schaeuble cautioned that the meeting would not yield a definitive solution for the crisis that started in Greece two years ago and has since spread across the 17-nation bloc, leading some experts to predict a breakup.

His comment weighed on the euro, which fell one percent against the dollar after hitting a one-month high earlier in the day. European stocks also fell.

Ahead of a 48-hour general strike in Greece that is expected to bring the country to a standstill just as parliament votes on a new set of controversial austerity measures, Greek Prime Minister George Papandreou appealed for unity. This is maybe the most crucial week for Greece and Europe, he said during a meeting with the Greek president.

Hours later, however, a deputy from Papandreou's party quit his seat in protest against what he called unjust steps. The lawmaker will be replaced by another socialist, so Papandreou's four-seat majority in the 300-strong assembly is unchanged.

Greece's overall debt is forecast to climb to 357 billion euros ($491.4 billion) this year, or 162 percent of annual economic output -- a level economists agree is unsustainable.

To reduce this mountain, euro zone leaders are racing to convince banks to accept voluntary writedowns of up to 50 percent on their sovereign holdings. At the same time, they are trying to agree on a blueprint for recapitalizing financial institutions at risk from the deepening crisis.

Determining how the writedowns will be applied and the source of funds to recapitalize the banks will require arduous negotiations between now and the deadlines the EU has set for itself, said Dan Morris, global strategist at J.P. Morgan Asset Management.

We remain optimistic an agreement will be found but returns have been so strong over the last few weeks there is a risk of disappointment if it takes longer to work out the details than investors expect.

LITTLE CHOICE

Charles Dallara of the Institute of International Finance (IIF), a lead negotiator for the banks, told Reuters that bigger writedowns could only happen if policymakers addressed broader sovereign debt issues in Europe.

If the official community is interested in asking the private sector to take another look at Greece then it will have to be only as part of a broader process of addressing the full range of sovereign debt issues in Europe, Dallara said.

Privately, bankers say addressing Greece's problems alone will accomplish little. They are pushing policymakers to come up with a stronger plan for addressing the woes of the entire euro zone, fearful that governments might come back with new demands in a matter of months if their latest steps fail.

One solution under discussion is leveraging the bloc's 440 billion euro rescue fund -- the European Financial Stability Facility (EFSF) -- to give it more firepower. But it is unclear whether Germany and other northern European members of the currency bloc will agree to this.

EU officials say the banks have little choice but to accept voluntarily the losses requested by governments, since the alternative would be a disorderly default that would trigger wider financial market chaos and bigger writedowns.

European finance ministers will meet on Friday to prepare the EU summit. Sources told Reuters that they would consider a three-pronged plan for shoring up banks, which have restricted interbank lending in the crisis, exacerbating market worries.

The plan foresees a higher minimum capital requirement for banks, an additional temporary buffer for those exposed to troubled euro debt, and a requirement that banks have adequate term funding, even if this means state-backed guarantees.

Leading German and French banks have said they will resist forced recapitalizations, but the French government made clear on Monday that this is what policymakers wanted.

French banks will be recapitalized even though they are solid because we are in a climate of extreme nervousness, extreme tension and lack of confidence so we must strengthen all the banks, French government spokeswoman Valerie Pecresse said on French radio.

We are going toward a collective European solution, she added. We will ask all European banks to have 9 percent capital ratios by 2013 to be more solid to face risk.

The deadline Pecresse mentioned was much later than EU officials have suggested. They want banks to be given three to six months to reach the target.

German Chancellor Angela Merkel's spokesman said the government was working intensively to define how German banks would participate in a second rescue package for Greece and how to make best use of the EFSF.

But like Schaeuble, he cautioned against high expectations. Merkel and French President Nicolas Sarkozy promised last week that they would unveil a new comprehensive plan by the end of the month, boosting investor hopes.

The chancellor has pointed out that the dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled, spokesman Steffen Seibert said.

In Portugal, another debt-ridden euro zone country that was granted an EU/IMF bailout in May, a draft budget bill forecast that a recession will worsen next year as the government adopts severe austerity measures to rebuild the country's finances.

The draft, presented on Monday, foresees the economy contracting 2.8 percent in 2012, compared with a 1.9 percent slump this year.

Lisbon's center-right government presented the austerity measures as part of the 2012 budget on Friday. They include cuts to year-end and holiday bonuses for civil servants. Unions have promised a general strike in response.

($1 = 0.727 Euros)

(Writing by Noah Barkin; Additional reporting by Huw Jones and Steve Slater in London, Angeliki Koutantou in Athens, Stephen Brown, Annika Breidthardt and Alexandra Hudson in Berlin, John Irish in Paris, Sergio Goncalves and Axel Bugge in Lisbon; Editing by Paul Taylor and Mark Heinrich)