France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets.
Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.
Bond market turmoil is spreading across Europe. Italian 10-year bond yields have risen above 7 percent, unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria -- which along with Germany form the core of the euro zone -- have also climbed.
Asian shares and the euro fell further Thursday as doubts deepened about Europe's ability to stop its sovereign debt crisis from spinning out of control.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2 percent, while Japan's Nikkei stock average opened down 0.5 percent.
The euro hovered near five-week lows against the dollar, trading not far off Wednesday's trough around $1.3430, a low not seen since October 10.
The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe, French government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris.
French Finance Minister Francois Baroin repeated Paris's view that the euro zone's EFSF bailout fund should have a banking license, something Berlin opposes. Such a move would allow the fund to borrow from the ECB, giving it extra firepower to fight the spreading crisis.
The position of France ... is that the way to prevent contagion is for the EFSF to have a banking license, Baroin said on the sidelines of an awards ceremony.
But German Chancellor Angela Merkel made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action.
The way we see the treaties, the ECB doesn't have the possibility of solving these problems, she said after talks with visiting Irish Prime Minister Enda Kenny.
The only way to recover markets' confidence was to implement agreed economic reforms and build a closer European political union by changing the EU treaty, Merkel said.
ECB policymakers continue to reject international calls to intervene decisively as Europe's lender of last resort, stressing that it is up to governments to resolve the debt crisis through austerity measures and reforms.
However, many analysts believe such a move now represents the only way to stem the contagion, despite the potential risk of inflation from printing money.
Traders said the ECB bought Spanish and Italian bonds on Wednesday, but the respite was short and there was no sign of a change in its policy of limited, stop-go purchases to calm markets temporarily while maintaining pressure on governments.
Fitch Ratings warned it might lower its stable rating outlook for U.S. banks because of contagion from problems in troubled European markets.
Obama, on a visit to Australia, turned up the heat on Europe to act more boldly to extinguish the bush fire.
Until we put in place a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes, we are going to continue to see the kinds of market turmoil we saw, he said.
Obama said that, while new unity governments in Italy and Greece represented progress, Europe still faced a problem of political will.
International efforts to fight Europe's worsening debt crisis received a setback when the International Monetary Fund's European chief resigned, citing personal reasons.
Antonio Borges last month suggested the IMF could buy Spanish or Italian bonds alongside the euro zone's bailout fund but quickly backtracked, saying the IMF could only lend to states, not intervene in bond markets directly.
In Italy, new Prime Minister Mario Monti was expected to unveil his policy program Thursday the day after being sworn in at the head of a 16-strong cabinet of experts.
The respected economics professor kept the key economy portfolio for himself and the broad thrust of his platform is expected to match reform demands made by European authorities.
Controlling public spending, reforming the pension system, loosening job protection measures, opening up protected professions to more competition and imposing a tax on private assets are some of the measures he could announce.
With Italy's borrowing costs now at untenable levels, Monti will have to work fast to calm financial markets that Italy needs to refinance some 200 billion euros ($273 billion) of bonds by the end of April.
Some analysts say his cabinet of technocrats could be vulnerable to ambushes in parliament, but Monti said the absence of politicians in the team would free its hands.
Federico Ghizzoni, chief of Unicredit, said he would ask the ECB to increase access to central bank funds for Italian banks, whose funding problems have grown since Italy was sucked into the debt crisis in July.
Greece's new technocrat Prime Minister Lucas Papademos faced mass street protests Thursday, the day after winning a confidence vote for a national crisis coalition that is already split on the need for further austerity measures.
The size and mood of the rally, the first big protest in almost a month, will signal just how bitterly a restive public will fight further tax rises and spending cuts that international lenders demand in return for a massive bailout.
Greece's main conservative leader Antonis Samaras has refused to bow to EU demands for a written commitment to the bailout program and called for elections in three months to restore social peace.
New data showed that Greece's austerity-fueled recession had widened the budget deficit in October, the government failing to boost revenues despite unpopular new taxes.
ECB President Mario Draghi has said the 17-nation currency bloc will be in a mild recession by the end of the year, making it tougher for governments to put their finances in order, and Europe's debt crisis is also increasing strains in the money market, the plumbing of the international financial system.
Euro zone banks are finding it harder to obtain dollar funding. While the stresses are nowhere the levels of the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.
(Additional reporting by Emelia Sithole-Matarise in London, Gareth Jones and Dina Kyriakidou in Athens, Deepa Babington in Rome, David Lawder in Washington; Writing by Paul Taylor and Jon Boyle; Editing by Michael Roddy)