The European Union postponed a summit by a week on Monday to allow time for a broader solution to Greece's debt crisis, after Athens said it had concluded talks with international lenders on an aid payment needed to avert default.
The euro and world stocks rose sharply after the leaders of Germany and France gave investors hope on Sunday night by promising a plan soon to recapitalize Europe's banks.
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.
Sarkozy assured U.S. President Barack Obama by telephone on Monday that Europe's two leading powers were working on a plan to solve the crisis before a G20 summit in France in early November.
Obama has repeatedly urged the Europeans to take more decisive action to prevent serious harm to the world economy.
The next regular summit of EU leaders was postponed until 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 recapitalisation and the enhanced efficiency of stabilisation tools, he said in a statement, referring to the European Financial Stability Facility (EFSF) bailout fund, which European leaders agreed in July to expand and give new powers.
Investors remain cautious due to the lack of detail about the Franco-German plan, and the risk that a solution may be derailed by an event such as political deadlock in Slovakia, the one euro country that has yet to approve the EFSF expansion.
The chairman of euro zone finance ministers, Jean-Claude Juncker, refused in a television interview to rule out a compulsory writedown of 50 to 60 percent of Greek debt.
I do not rule out a debt cut but one should not think that simply a brutal debt cut would suffice in Greece, Juncker told ORF Austrian television. One has to take care that this does not lead to the danger of contagion elsewhere in the euro zone.
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.
Recapitalisation 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 wrapped up 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 instalment 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 worsened 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 on 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.
Malta became the 16th euro zone state to approve the new powers for the EFSF rescue fund on Monday, leaving Slovakia as the only nation still to do so.
One small party in Slovak Prime Minister Iveta Radicova's governing coalition opposes expanding the EFSF, which requires the unanimous consent of all euro zone states, an example of how difficult policymaking can be across the 17-member zone.
Slovakia's parliament votes on EFSF expansion on Tuesday. Radicova threatened to quit or hold a confidence vote that could bring down her government if her coalition partners do not back the measure. She could rely on the opposition to support it if her coalition partners balk.
The fragility of Europe's banks was highlighted early on Monday when the board of Franco-Belgian municipal lender Dexia
Austria's Erste Group Bank
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 EFSF and remove all uncertainty about Greece's economic future to prevent economic disaster.
(Additional reporting by John O'Donnell and Robin Emmott in Brussels, Michael Shields in Vienna, Natsuko Waki in London, Ingrid Melander in Athens, Martin Santa in Bratislava; Writing by Paul Taylor; Editing by Peter Graff)