EU finance ministers neared agreement on Saturday on a framework to provide 100 billion euros to European banks, but were still wrangling over how to do it as Spain, Italy and Portugal raised concerns over the cost.
Meetings were being held over the weekend to tackle Greece's debt and its impact on the European banking system. On Saturday, finance ministers were trying to figure out how to bolster the capital of European banks to cope with any Greek default, and prevent contagion to other heavily indebted countries.
EU officials have said that almost 100 billion euros is required to reinforce the region's banking system. European banks would be required to increase their core tier one capital ratio to 9 percent to help them withstand losses on sovereign debt, officials have said.
Banks that cannot raise money on the markets will have to turn to national governments or the European Financial Stability Facility (EFSF).
While there was basic agreement on Saturday afternoon over the size of recapitalization, finance ministers were still wrangling over how long banks had to recapitalize. They had also not yet agreed on the order in which banks would tap the private sector, government money and the euro zone's rescue scheme - the European Financial Stability Facility, or EFSF.
In particular, Italy and Spain did not want to have to take a program of aid from the euro zone in order to help their weak lenders, said one diplomat.
There is 24 against three - Italy, Spain and Portugal, said one euro zone diplomat. They think it's too expensive. They don't want to pay it.
The pan-European drive to recapitalize banks is designed to win back market confidence and make it easier for EU banks to borrow again amid a creeping credit freeze, triggered by worries over the future of the euro zone.
In a speech to members of her Christian Democrat party on Saturday, German Chancellor Angela Merkel urged countries like Italy and Spain to reduce their sovereign debt levels.
Spain has already done a lot but it will probably have to do more to win back the markets' confidence, Merkel said.
If they don't do anything with their budgets, if they continue to have budget deficits equal to 120 percent (of GDP) like Italy, then it won't matter how high the protective wall is because it won't help to win back the markets' confidence.
France and Germany have been divided over the best way to scale up the EFSF, and Merkel and French President Nicolas Sarkozy were scheduled to meet late on Saturday to try to break the deadlock before Sunday's summit of leaders.
They were due to be joined by International Monetary Fund managing director Christine Lagarde, European Central Bank president Jean-Claude Trichet, European Council President Herman Van Rompuy and Commission President Jose Manuel Barroso.
France is keen to rely on the EFSF and fears its credit rating could come under threat if the wrong method is chosen to scale up the fund to prevent contagion spreading to Italy and Spain, the euro zone's third and fourth largest economies.
Ratings agency Standard & Poor's said on Friday it was likely to downgrade France and four other states if Europe slips into recession. It was the second agency this week to cast doubt on France's rating, after Moody's on Tuesday.
But Bundesbank president Jens Weidmann said in a newspaper interview released on Saturday that repeatedly expanding the euro zone rescue fund would not resolve the euro zone crisis.
Euro zone finance ministers made some progress on Friday, agreeing that holders of Greek government bonds would need to take far more than the 21 percent haircut brokered in July.
We have agreed yesterday that we have to have a significant increase in the banks' contribution, Jean-Claude Juncker, who chairs the euro group of finance ministers, said on Saturday morning.
A bleak analysis by the EU and the International Monetary Fund showed on Friday that private holders of Greek debt may need to accept losses of up to 60 percent on their investments.
Austrian Finance Minister Maria Fekter told reporters Italian treasury official Vittorio Grilli would negotiate heavier debt writedowns with private investors as part of a second Greek aid package.
Greece's finance minister welcomed a decision late on Friday to approve an 8 billion euro loan tranche that Athens needs next month to pay its bills.
The disbursement of the sixth tranche is an important and productive step, Evangelos Venizelos told reporters on Saturday.
Greece is not the central problem, now the point is to take more general and more constructive decisions for the euro zone as a whole.
(Additional reporting by Matthew Falloon, Andreas Rinke, John O'Donnell, Robin Emmott and Julien Toyer; Writing by Sebastian Moffett; Editing by Andrew Roche)