The leaders of Germany and Britain sent out different signals on Friday about how to solve the euro zone's debt crisis and admitted they had failed to narrow differences over the introduction of a financial transaction tax in Europe.

At a news conference in Berlin, Prime Minister David Cameron said the currency bloc needed a credible firewall and should use all of its institutions to fight the crisis, but his host German Chancellor Angela Merkel said she favoured a step by step approach.

The British demand that we use a large amount of firepower to win back credibility for the euro zone is right. But we have to take care that we don't pretend to have powers we don't have. Because the markets will figure out very quickly that this won't work.

Asked about agreement on a financial transaction tax, Merkel said the two had not made any progress overcoming divergent views on the introduction of such a tax in Europe.

(Reporting by Stephen Brown; Writing by Noah Barkin and Erik Kirschbaum)