Global leaders on Saturday arranged a round of emergency calls to discuss the twin debt crises in Europe and the United States that are causing turmoil in financial markets.
The European Central Bank's policy-setting council will hold a rare Sunday conference call to talk about the euro zone problems, ECB sources said.
Markets are anxiously looking for the central bank to start buying Italian and Spanish debt on Monday to stabilize prices, a move that has split the ECB governing council.
But more pressure on the bonds of the two countries after last week's steep sell-off could undermine an already damaged European banking system and lock Italy, the world's eighth largest economy, out of the market.
Worsening the outlook was the Standard and Poor's downgrade of the U.S. sovereign credit rating late on Friday on concerns about its budget deficits and growing debt burden.
While not totally unexpected, the loss of top-tier AAA status by the world's economic superpower drew fierce criticism from China, a huge holder of U.S. debt, and promised more anxiety for global financial markets.
French President Nicolas Sarkozy, who heads the G20 group of the world's leading economies, will discuss the financial situation in light of the U.S. downgrade with British Prime Minister David Cameron on Saturday evening, his office said.
Finance ministers and central bankers of the G7 group of major industrialized nations will confer by telephone on Saturday or Sunday, a senior European diplomatic source said.
Their deputies from the broader G20 were due to hold a call on Saturday evening, a Brazilian finance ministry source said.
GRIDLOCK IN WASHINGTON
China bluntly criticized the United States after the S&P ratings cut to AA-plus, saying Washington had only itself to blame and calling for a new stable global reserve currency.
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a commentary.
After a week which saw $2.5 trillion wiped off global markets, the S&P move deepened fears of an impending recession in the United States as euro zone countries struggle with a debt crisis of their own.
S&P blamed the downgrade in part on gridlock in Washington, saying politics was preventing steps to address the debt and deficit problems. Amid a vitriolic fight between Democrats and Republicans, U.S. lawmakers reached a last-minute debt deal last week to avoid an unprecedented default by the government.
President Barack Obama urged lawmakers to set aside partisan politics, saying they must work to put the nation's fiscal house in order and stimulate the stagnant economy. He called on Congress to give tax relief to the middle class, extend jobless benefits and pass long-delayed trade pacts.
The European source said the U.S. downgrade, added to the situation in Europe, raised the need for international policy coordination.
"The G7 will confer by telephone. It's not yet confirmed whether it will be in one stage or in two stages, tonight and tomorrow," the source said.
French Finance Minister Francois Baroin, who would chair any meeting under France's G7 and G20 presidency, said it was too soon to say whether there would be an early G7 gathering.
Dutch Finance Minister Jan Kees de Jager said: "I am in constant contact with colleagues in other countries and am following the development of the financial markets closely."
China and Japan have called for coordinated action to avert a new worldwide financial crisis. India's Finance Minister Pranab Mukherjee told reporters: "There is no need to unnecessarily press the panic button."
Recrimination flew thick and fast among U.S. politicians, with each side seeking to blame the other for the downgrade and the impasse over how to solve the fiscal crisis.
Senator Jim Demint, a Republican, said Obama should demand the resignation of Treasury Secretary Timothy Geithner.
White House spokesman Jay Carney said Obama believes "it is important that our elected leaders come together to strengthen our economy and put our nation on a stronger fiscal footing."
Xinhua scorned the United States for a "debt addiction" and "short sighted" political wrangling. China, it said, "has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets."
"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.
In contrast, France's Baroin said France had faith in the United States to get out of this "difficult period." Friday's U.S. unemployment numbers were better than expected and so things were heading in the right direction, he said.
"One should not dramatize, one needs to remain cool-headed, one should look at the fundamentals," he told France's iTele.
"There is no need for panic," Polish Prime Minister Donald Tusk said. "We will see in August, and maybe more intensively in September what the effects for the world economy will be."
Because the S&P move was expected, the impact on markets may be modest when they reopen on Monday. But the ratings cut may have a long-term impact for U.S. standing in the world, the dollar's status and the global financial system.
"The consequence will be far reaching," said Ciaran O'Hagan, fixed income strategist at Societe Generale in Paris.
"It will weigh on secure assets. The bigger reaction will be on risky assets, including equities and on agencies (Freddie Mac, Fannie Mae) and states backed directly by the federal government."
But he added: "U.S. Treasuries will remain a benchmark. This is a ship which takes a long time to turn around."
Norbert Barthle, a budget expert for German Chancellor Angela Merkel's conservatives, said the downgrade would certainly provoke further turbulence in markets.
"I'm not surprised about the U.S. rating downgrade, rather I am astonished that, for weeks, international rating agencies have focused their attention on the European debt situation but not the American one," he said.
"For a while, there have been clear worries about America's economic woes but also the fact the U.S. is heavily indebted."
NO EARLY ITALIAN ELECTION
Italian Prime Minister Silvio Berlusconi on Saturday ruled out calling early elections to stem market panic that has pounded Italian assets and forced his government to bring forward austerity measures.
European policy makers are concerned that a debt emergency in the euro zone's third largest economy could completely overwhelm bailout mechanisms set up to help smaller troubled countries like Greece or Ireland.
Italy is due to go to the polls in 2013 but Berlusconi dismissed any suggestion of emulating Spain, where Prime Minister Jose Luis Rodriguez Zapatero has called an early election to tackle the crisis.
"This has absolutely not been talked about," Berlusconi told reporters. "This has never been an option."
The European Union's top economic official praised Italy's decision to accelerate budget-balancing measures and structural reforms and said swift implementation was now crucial.
"I strongly support this announcement and call on the authorities to quickly translate it into concrete measures," European Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in a telephone interview.
The ECB sources said the central bank remains divided over whether to buy Italian government bonds but that even some of those who favor the move say Italy should do more to front-load austerity measures.
(Reporting by Isabel Versiani and Brian Winter in Brasilia, Laura MacInnis in Washington and other Reuters bureaux worldwide; Writing by Angus MacSwan and Stella Dawson; Editing by John O'Callaghan)