Treasury Secretary Timothy Geithner and Italian Prime Minister Silvio Berlusconi sought to support the battered euro on Wednesday, but the currency extended its decline on a report that China was reviewing its euro holdings.
Geithner told Europeans that financial markets want to see euro zone countries put into action their $1 trillion standby package designed to stabilize the currency, and Berlusconi called on European partners to follow his lead and impose austerity to help solve the euro zone debt crisis.
But a Financial Times report injected new uncertainty. The British newspaper's website said representatives of the Chinese entity that manages foreign reserves had met with foreign bankers in Beijing recently to discuss Chinese exposure to euro zone debt.
That contributed to the euro's third straight day of decline versus the U.S. dollar, pushing it toward a four-year low.
China has been looking to diversify its largely dollar-denominated holdings, so any potential shift away from the euro could add to nervousness about the European crisis.
Geithner, on a visit to London, also urged European countries to work for a globally consistent approach to financial reform.
After talks with his British counterpart, George Osborne, Geithner said of the EU plan to support indebted states: It's a good program (and) has got all the right elements. What markets want to see is action.
The fund would provide heavily conditioned loans to euro zone governments that had difficulty borrowing on capital markets after a separate bailout for Greece failed to calm fears of a sovereign debt default in southern European countries.
European shares rallied as much as 3.5 percent from Tuesday's nine-month lows before paring gains to 2.4 percent on the session. Wall Street indexes wilted in late afternoon trading and the Dow closed below 10,000.
Berlusconi sought to support the euro with a vigorous defense of his government's 25 billion euro ($30.65 billion) austerity package, approved by his cabinet in an emergency decree late on Tuesday.
Italy joined Spain and Portugal in pushing through spending cuts to limit contagion from the Greek crisis.
Like those countries, Italy also antagonized labor. The largest Italian union announced plans to strike, saying the measures would hit the poorest workers hardest and spare the rich.
The sacrifices required are indispensable to save the euro, Berlusconi said, calling Italy's spending cuts less draconian than those approved by most of its EU partners. For years, Italy -- like many countries in Europe -- lived above its means. We are all in the same boat.
GERMANY ACTS ALONE
Geithner's stress on coordination of new regulation appeared aimed chiefly at Germany, Europe's biggest economy, which stunned markets and angered EU partners by unilaterally banning some speculative financial trades last week.
He was due to meet German Finance Minister Wolfgang Schaeuble in Berlin on Thursday after dinner in Frankfurt with European Central Bank President Jean-Claude Trichet.
The executive European Commission outlined a framework on Wednesday for a levy on banks' assets, liabilities or profits to pay in advance for the cost of future crises, setting the stage for a showdown on the tax at the Group of 20 summit in Toronto next month.
On this question, we can go forward by ourselves, on our own, Michel Barnier, the EU's financial markets chief, told Reuters. It is not up to the United States to pay for the financial stability of Europe.
The Commission said the proceeds of a bank levy should be reserved for national bank resolution funds, putting Brussels at odds with France and Britain, which want the money to help strapped national budgets.
Fears that Europe's debt crisis could engulf some banks have made them reluctant to lend to each other as happened during the 2007-09 financial crisis.
The Paris-based Organization for Economic Co-operation and Development said the global economy was recovering faster than expected from recession, with Asia leading the way, but remained at risk due to huge debts in industrialized countries.
(Additional reporting by Sumeet Desai in London; Daniel Flynn and Deepa Babington in Rome; Wanfeng Zhou and Chuck Mikolajczak in New York; Editing by Kenneth Barry)