Chancellor Angela Merkel and President Nicolas Sarkozy gave no details of their proposals but said they would also cover closer euro zone integration and steps to tackle Greece's debt mountain and prevent financial market contagion.
The German and French governments are convinced this will be a contribution to the euro zone winning back confidence and its capacity to act -- and I do mean a contribution, not the 'miracle cure' everyone keeps asking for, German government spokesman Steffen Seibert said.
The next regular summit of EU leaders was postponed by six days to October 23 to allow time to finalize our comprehensive strategy on the euro area sovereign debt crisis, European Council President Herman Van Rompuy announced.
Further elements are needed to address the situation in Greece, the bank recapitalization and the enhanced efficiency of stabilization tools (EFSF), he said in a statement.
Investors remain cautious due to the lack of detail about the Franco-German plan, and the risk that any solution may be derailed by an event such as political deadlock in Slovakia over approving new powers for the euro zone's rescue fund.
The German candidate for the European Central Bank's executive board said on Monday that all systemically important banks in the 27-nation EU should be made to raise fresh capital simultaneously to avoid singling out individual lenders.
Recapitalization should be done in an EU27 context in a way to avoid stigma effects, Joerg Asmussen told the European parliament. The best is not to do this institution by institution, but to do this for all systemically important banks in the EU 27 at the same time.
In Athens, Finance Minister Evangelos Venizelos said Greece had concluded talks with European Union and International Monetary Fund officials and expected private bondholders to make a bigger contribution than originally envisaged in a second bailout deal agreed in July.
Greece says it needs an 8 billion euro aid installment in November to avoid running out of money to pay salaries and pensions. Its next bond redemption is due in December.
Venizelos said Athens expected improvements in the 109 billion euro rescue package agreed by euro zone leaders and hinted that banks will take heavier losses, calling it PSI Plus. PSI stands for private sector involvement.
We expect an overall package better than the one initially drafted, because we have to take into consideration the new parameters, he said, alluding to a deeper than expected recession that has derailed Greece's budget deficits.
The EU, IMF and ECB mission chiefs, known as the troika, are likely to conclude their visit with a joint statement by Tuesday. They will then prepare reports for euro zone finance ministers and the IMF board to decide on the aid tranche.
A German newspaper said Merkel had concluded Greece was insolvent and was pushing for a mandatory debt restructuring.
Business daily FT Deutschland, citing unnamed government officials, said Germany was trying to persuade EU partners to accept the inevitable, but faced opposition from the European Commission, the European Central Bank, and several member states, including France.
German Finance Minister Wolfgang Schaeuble has said private bondholders may have to contribute more than the 21 percent writedown agreed in July. Government spokesman Seibert declined to go further, saying Berlin was awaiting the troika's report.
On the eve of a crucial parliamentary vote on broadening the EFSF fund's scope, Slovakia's prime minister threatened to resign or tie the issue to a confidence vote that could bring down the government after a small party in her five-party coalition rejected a compromise proposal.
The fragility of Europe's banks was highlighted early on Monday when the board of Franco-Belgian municipal lender Dexia approved a break-up plan under which the French and Belgian governments will guarantee 90 billion euros in toxic assets, including euro zone sovereign bonds.
Austria's Erste Group Bank, the second biggest lender in emerging Europe, said it would lose up to 800 million euros this year and not pay a dividend after taking hits on foreign currency loans in Hungary and euro zone sovereign debt.
Other European banks expect to be ordered to raise more capital under the Franco-German effort to draw a line under the debt crisis.
We expect the EU to come up with a minimum core tier I (capital) level under certain stress scenarios and a higher one without any stress. Then banks will be asked to reach this level in a short period of time, said a senior German banker.
Banks were not involved in talks yet with governments on likely capital needs, several bankers said, although options were being considered in case they need to act quickly.
From outside the euro area, British Prime Minister David Cameron urged euro zone leaders to take a big bazooka approach to the crisis, telling the Financial Times they need to break a cycle of doing a bit too little, a bit too late.
He pressed them to increase the firepower of the 440 billion euro European Financial Stability Facility and remove all uncertainty about Greece's economic future to prevent economic disaster.