Berlin has dampened expectations that an upcoming EU summit will finally force the debt crisis genie back into its bottle, amid warnings that market instability is damaging the real economy.
Financial markets and the euro both rallied early on Monday on optimism that European Union leaders were set to hammer out a final deal to rescue debt-laden Greece from bankruptcy in Brussels on Sunday, but comments by German Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel's top spokesman, Steffan Seibert, gave the markets a cold shower.
Speaking in Duesseldorf, Schaeuble said that while EU leaders were set to "provide cover for uncertainty in financial markets", a permanent solution was unlikely to arise out of Sunday's summit.
He also warned that markets must rapidly stabilise if Europe were to avoid damage to its real economy.
EU leaders are likely to agree on forcing banks to recapitalise as part of a comprehensive package to fight the growing debt crisis which is undermining the stability of the euro.
Seibert, speaking at a regular government news conference, also warned that measures agreed by leaders in Brussels would not immediately solve the crisis.
"Dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled," he said.
Decisions to be reached on Sunday will be part and parcel of "important working steps on a long path that will reach into next year", he said.
He declined to go into details, saying that EU governments were still working on the details of a deal.
But Merkel will address parliament later in the week, probably on Friday, to outline her government's priorities, he said.
London's benchmark FTSE 100 index closed down 0.54 per cent, Frankfurt's DAX 30 lost 1.81 per cent and in Paris the CAC 40 dropped 1.61 per cent.
The euro reached an intra-day high of $US1.3914, before tumbling to $US1.3763. That was down from $US1.3881 in New York on Friday.
Under intense pressure from their international partners at a meeting of G20 finance ministers and central bankers in Paris at the weekend, Europeans pledged to deliver at this weekend's summit.
French Finance Minister Francois Baroin said: "The results of the October 23 summit will be decisive."
German officials are usually more cautious in their statements, while the tone elsewhere in Europe was more urgent.
"I am hoping for a unanimous decision by governments to respond to this urgent situation," European Commission President Jose Manuel Barroso said.
"I'm noticing that there is an awareness that this is a very critical moment and of the need for a decisive answer," he told France's BFM radio.
Barroso reaffirmed the commission's proposal to face the euro zone crisis by using the 440-billion-euro ($594 billion) European rescue fund to keep the crisis from spreading from peripheral countries such as Greece to core economies such as Spain or Italy.
Barroso said EU states were against increasing the fund's size, but that several technical solutions were being floated to increase the fund's firepower.
The fund's breadth could be leveraged "not necessarily by turning the fund into a bank", but by using existing capital as a guarantee, Barroso said.
France is thought to prefer turning the fund, the European Financial Stability Facility, into a bank, something that Germany opposes.
For Greek Prime Minister George Papandreou the euro zone faces its "most critical week" ahead of the summit.
The week ahead "will determine the fate of the euro zone", Papandreou said, warning of prolonged "insecurity" unless definitive decisions are taken.
Greece has been kept waiting for two months for a slice of bankruptcy-saving funds, part of a 110-billion-euro loan from the EU and the International Monetary Fund contracted last year.
Accused by its peers of dragging its feet over tough economic reforms promised in return for the money, Athens has gone into spending cuts overdrive this past month, pushing through new austerity legislation that has caused widespread protests.
AFP