France vowed Tuesday to keep its triple-A rating following a warning from Moody's, as Germany's Angela Merkel warned that the upcoming EU summit was only one step in resolving a crisis over eurozone debt that took years to build up.
The European Union insisted there was no reason to "raise alarms" over the Moody's warning on France, but the markets appeared to disagree, with European stocks tumbling and the euro sliding against the dollar.
Paris shares fell 0.79 percent, mirroring falls on most other European exchanges and following earlier drops on Asian markets amid concerns over the spreading impact of the eurozone's debt woes.
The warning from Moody's came with only five days to go before a crucial summit of European leaders that will seek to address the eurozone sovereign debt crisis, which is threatening to drag the global economy back into recession.
The summit in Brussels will aim to overcome the eurozone sovereign debt crisis, Merkel told reporters in Berlin late Tuesday.
But "this debt has been accumulated over years and that is why this cannot be resolved during one summit", the German chancellor said.
"Next Sunday's EU summit will mark an important step. But more steps will then follow as the aim is to overcome a debt crisis of states" that has built up over decades, she told a news conference.
On Sunday "we shall take important and adequate decisions which will be followed by other decisions" in the future, she added.
But in another sign of gloom, Moody's on Tuesday downgraded Spain's debt rating two notches from A1 to Aa2, warning that no "credible" resolution to the country's economic crisis had yet emerged.
Describing a now familiar malaise of slow growth and crushing private and public debt, Moody's in effect issued a vote of no confidence in Spain and the European Union's handling of the crisis so far.
French President Nicolas Sarkozy had said earlier that Europe was preparing to take major decisions.
"The world and Europe are going through an unprecedented financial crisis. This crisis will bring us in the coming days to take important, very important, decisions," Sarkozy said Tuesday in the French Riviera city of Nice.
"The euro is at the heart of the European project. Letting the euro be destroyed is to risk the destruction of Europe," he said.
Merkel also said EU leaders would make use of the summit to "clearly back the euro" which has come under attack in the financial markets.
But Finance Minister Francois Baroin was forced to move quickly to take the pressure off from Moody's warning, promising that France will "take all measures" to keep its cherished top rating.
"We will be there to preserve our triple-A rating... We will do everything in our power not to be downgraded," Baroin told France 2 television after Moody's issued the warning, saying it was was concerned over France's financial strength.
Budget Minister Valerie Pecresse said the planned reforms and spending cuts in France's draft 2012 would be sufficient to preserve its top credit rating.
But in a sign of growing concerns over the crisis, Baroin also said France's economic growth forecast of 1.75 percent for next year was "probably too high" and that "there is a risk" growth will be below 1.5 percent.
Moody's fired the warning shot at France late on Monday, saying it would determine over the coming three months whether Europe's second-largest economy merited its stable status.
Moody's said France's "financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis has led to a deterioration in French government debt metrics -- which are now among the weakest of France's Aaa peers".
France is rated triple-A by all three leading credit rating agencies, Moody's, Standard & Poor's and Fitch Ratings.
The warning came after Berlin sought to lower expectations for a European Union summit this weekend.
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 an EU summit this coming Sunday.
But German Finance Minister Wolfgang Schaeuble said Monday that while EU leaders meeting in Brussels were set to "provide cover for uncertainty in financial markets", a permanent solution was unlikely to emerge from the summit.
The summit is to prepare measures to strengthen the eurozone's financial system, including forced recapitalisation of banks, from an expected major cut in the value of Greece's bonds.
The chairman of major Spanish bank Santander rejected emergency plans to make European lenders bolster their capital, saying Tuesday it would worsen market panic and curb lending.
"These proposals make no sense," Emilio Botin, chairman of Santander, Europe's biggest bank by capitalisation, told a bankers' conference in Madrid.
"They create insecurity and confusion" and "increase uncertainty in the markets", he warned, adding that forcing banks to recapitalise would prompt many to cut back lending.
Meanwhile, the Institute of International Finance, which represents private holders of Greek bonds, said its chief Charles Dallara was, along with Deutsche Bank head Josef Ackermann, meeting with European officials to discuss how much of a loss creditors would be expected to take on Greek debt.