France and Germany have agreed to boost a euro zone financial rescue fund to two trillion euros ($2.76 trillion), part of a plan to resolve the bloc's debt crisis that should win support at Sunday's EU crisis summit, Britain's Guardian newspaper said on Tuesday.
The paper, citing senior European Union diplomats, said the euro zone will endorse a five-fold increase in the 440-billion-euro bailout fund, giving it some two trillion euros to help troubled governments and banks survive should Greece or any other troubled euro zone country default.
The paper said confidence that the plan would be approved at the summit was on the rise after Moody's warned it might put France's top AAA credit rating on review, citing the cost of bailing out troubled banks or other members of the euro zone.
A senior euro zone source, however, told Reuters there had been no mention of such a deal.
Earlier, German Chancellor Angela Merkel warned that leaders would not solve the debt crisis at one summit meeting.
U.S. stocks and the euro rose on the report, though traders said they were taking a wait-and-see approach.
If true, the news would be what the market's been looking for, and two trillion seems to be in the right neighborhood, said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey,
But, he added, I have to take it with a grain of salt. We've seen a lot of these European reports that something was imminent only to be disappointed the next morning.
Markets have been on edge for fear European leaders would not agree on a plan to address the crisis, which has already forced Greece, Ireland and Portugal to seek bailouts and has driven up borrowing costs in Italy and Spain.
European banks with heavy exposure to troubled sovereign debt have also found it harder to fund operations, sparking fear that governments may have to bail them out.
According to the Guardian report, France and Germany agreed that Europe's banks should be recapitalized to meet the 9 percent ratio the European Bank Authority is demanding after having examined the exposure levels of between 60 and 70 systemic banks.
While French and German banks are said capable of meeting the new capital ratio on their own, other countries' banks may need help from the state or the expanded bailout fund, known as the European Financial Stability Fund, the paper reported.
Berlin and Paris are also said to be closer to agreement on increasing private sector involvement in a second 109-billion-euro rescue for Greece. The voluntary haircut for bond holders was set at 21 percent in July but worsening financial conditions have spurred Germany to push for private creditor losses of up to 50 percent.
(Reporting by Steven C. Johnson; Editing by James Dalgleish)