European stock markets ignored fresh warnings about Italy's ability to repay its debts by rising sharply at the start of Wednesday trading.Bank shares led the increase as the main markets in London, Frankfurt and Paris opened well above 2%.On Tuesday, Moody's cut Italy's credit rating by three notches and warned about the country's growth rate.But investors focused on news that European leaders are considering a co-ordinated effort to recapitalise banks.In an interview in the Financial Times, Olli Rehn, European commissioner for economic affairs, said: "There is an increasingly shared view that we need a concerted, co-ordinated approach."There is a sense of urgency among ministers and we need to move on," he said.On Tuesday, UK Chancellor of the Exchequer George Osborne said: "It's clear now that the European banking system needs to be strengthened and needs more capital."Struggling Franco-Belgium financial group Dexia is being split into its "good" and "bad" banks, a move that led to an initial 9% rise in its share prices in early trading.France's three big banks, heavily exposed to Greece, also rose more than 5%. Italy's three biggest banks jumped more than 2%. In London, Barclays rose 2.7% and RBS was 1.7% higher.The rise in Italian bank shares came despite expectations that, following Moody's downgrade of Italy from Aa2 to A2, the ratings agency will soon downgrade the banks.Moody's said in its report on Tuesday: "The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area."The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets," it said.The ratings agency blamed a "material increase in long-term funding risks for the euro area", due to lost confidence in eurozone government debts.Despite Rome's low current borrowing needs, and low private-sector debt levels in Italy, Moody's said market sentiment had turned against the euro.Prime Minister Silvio Berlusconi said Moody's decision was expected."The Italian government is working with the maximum commitment to achieve its budget objectives," said Mr Berlusconi.He said that a plan to balance the government's budget by 2013 had been approved by the European Commission.Analysts say Italy's downgrade is likely to be followed by similar cuts in the credit rating of Italy's banks, which would put severe pressure on their ability to borrow."This downgrade will make it even harder for Italy to borrow," says BBC business editor Robert Peston. "However, that is not the worst of it."If Italy is looking like a more risky place to lend, its banks... will find it harder and more expensive to borrow. The [eurozone] banking crisis will be exacerbated."The rationale for Moody's downgrade will also be worrying for other eurozone governments, such as Spain, whose borrowing costs have also risen like Italy's as markets have lost confidence in their creditworthiness."The question is, if [eurozone governments] will move fast enough... to really put in place a credible solution," says Robert Peston.An expansion of the eurozone's bailout fund already approved by the euro's 17 governments in July - which is now seen by markets as inadequate - has still yet to be ratified by all the national parliaments.The Italian government has for several years earned more in tax revenues than it spends. However, the government also has a large outstanding debt - equivalent to nearly 120% of GDP.The government relies heavily on the markets' willingness to relend these debts as they come due, and to lend it the cost of meeting its interest payments.Moody's said that Italy could be further downgraded to "substantially lower rating levels" if a further deterioration in investor sentiment made it even harder for the country to raise cash from the markets.