The United States said on Thursday world leaders must work to keep economic growth on track but Europe dug in its heels ahead of a G20 summit, insisting that now was the time to work on cutting costs.

With the global economy tentatively emerging from its worst slump in decades, the Group of 20 nations head for their weekend summit in Toronto struggling to agree the next steps but divided over whether Europe's new budget austerity plans could torpedo the fragile recovery.

G20 leaders must also forge consensus on how to harmonize financial regulatory reforms, but still face differences on the breadth and timing of measures they hope will prevent another meltdown of the banking sector.

President Barack Obama, pushing Washington's pro-growth, line, said surplus countries -- often code for Germany and China -- must find ways to stimulate growth while acknowledging that countries including the United States with medium- and long-term deficit problems would have to address them.

Not every country is going to respond exactly the same way, but all of us are going to have responsibilities to rebalance in ways that allow for long-term, sustained economic growth, Obama said in Washington during an appearance with Russian President Dmitry Medvedev.

White House economic advisor Lawrence Summers, in an interview with Reuters, also stressed that growth would be key, but played down differences on the need to tackle high debts and deficits that have led to financial problems in some European countries.

There obviously is an importance in having a growth strategy, but I think it's too simple to think of growth strategies only as running budget deficits or printing money, he said.

In Europe, however, senior officials were in no mood to back down on their plans to cut spending.

Saying she expected controversial discussions in Toronto over Europe's budget priorities, German Chancellor Angela Merkel insisted Berlin would forge ahead with its biggest program of fiscal cutbacks since World War Two.

European Central Bank President Jean-Claude Trichet dismissed the idea budget cuts could torpedo the fragile economic recovery that is taking hold.

The idea that austerity measures could trigger stagnation is incorrect, Trichet told Italian newspaper La Repubblica, describing the German budget plans as good and repeating calls for more fiscal discipline in the 16-nation euro zone.

Merkel, who aims to save 80 billion euros in the next four years, told ARD television sustained growth could only be guaranteed through getting a grip on deficits and debt.

I and the EU will argue this position. There are others who are not yet so convinced of this exit strategy, she said.

The G20, which includes the world's biggest economies and covers two-thirds of the world's population, holds its summit in Toronto on Saturday and Sunday. It will be preceded by a meeting of the G8, composed of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.

Downtown Toronto's downtown banking district has seen business drop off as heavy security is mounted. Canadian police said on Thursday they had arrested the driver of a car near the meeting site who was carrying a chainsaw, crossbow and fuel containers.


Eonomic policy has not been the only issue dividing the G20, which has also seen its unity tested by reforms to the banking sector.

European proposals for global taxes on banks and financial transactions have run into opposition from countries like Canada which say their banks are in good health.

And European countries are concerned that planned new rules requiring banks to set aside more capital may crimp lending.

Obama, meanwhile, hopes to sign off on rules to regulate finance within weeks as lawmakers raced to meet a Thursday deadline they had set themselves to agree their own financial overhaul package.

And Obama signaled on Thursday that China's move this week to relax the peg of its currency, the yuan, to the dollar may not be enough to shield Beijing from accusations that it is using the currency to gain an unfair trade advantage.

The initial signs were positive. But it is too early to tell whether the appreciation, that will track the market, is sufficient to allow for the rebalancing that we think is appropriate, Obama said.

The yuan has risen by about 0.4 percent against the dollar since Beijing's policy change -- a significant step relative to its earlier freeze, but far less than the 25-40 percent increase that some analysts say it needs to make to achieve fair value.


Canadian Finance Minister Jim Flaherty said the G20 had not agreed on specific deficit targets, saying the needs of countries with urgent budget problems needed to be weighed against those which still had room to maneuver.

That's the delicate balance that we need to try to strike this weekend beginning with fiscal consolidation among those countries that urgently must do so so that the markets have confidence, Flaherty told reporters in Toronto.

The draft version of the Toronto summit communique, dated June 11 and obtained by Reuters on Wednesday, said the economic recovery was uneven and fragile and warned against complacency.

Fiscal challenges in many states are creating market volatility, and could seriously threaten the recovery and weaken prospects for long-term growth, it said.

The United States has warned against withdrawing support too soon, mindful of when the government slammed the brakes on spending in the 1930s, prolonging the Great Depression. The U.S. Federal Reserve on Wednesday acknowledged the pace of U.S. economic recovery had faltered.

U.S. stocks fell on Thursday on concerns over the durability of the economic recovery.

President Lee Myung-bak of South Korea, which currently chairs the G20, said that countries should be careful of ripple effects from any budget cutting.

If European countries proceed with their fiscal austerity plans, the global economic turnaround may slow down, Lee told Toronto's Globe and Mail newspaper.

In Europe, a market backlash against countries seen to be dragging their feet on cutting debt and deficits has sparked budget cutbacks as governments try to rein in spending.

French unions staged a nationwide strike on Thursday over plans to reform the pension system following similar protests in Spain and Greece.

(Additional reporting by Nigel Davies in Madrid and Sakari Suoninen in Frankfurt, writing by Krista Hughes and Andrew Quinn, editing by David Storey and Frances Kerry)