EU leaders were under intense pressure Wednesday to convince markets they can come up with a rapid rescue plan for the eurozone following the threat of possible debt downgrades.
Just days before EU leaders convene for a do-or-die crisis summit in Brussels, Standard and Poor's announced it was putting the sovereign debt of almost all eurozone countries, as well as the bloc's 440-billion-euro ($590 billion) bailout fund, on review for a possible downgrade.
US Treasury Secretary Timothy Geithner, on a trip to European powerhouse Germany, said Tuesday "the eyes of the world are very much on Europe."
But Geithner welcomed what he called encouraging signs from European leaders in the eurozone crisis and conceded that the United States also faced "very challenging economic challenges... We have a lot of work ahead of us."
S&P's announcement spooked European markets which ended mostly lower, after taking a turn for the better Monday on a Franco-German plan for a new EU treaty and tougher budgetary rules, including sanctions for lax eurozone economies.
The debt warning means that Germany and France could lose their top-notch credit ratings without urgent action, a particularly crushing blow for Germany which has always seen its gold-standard AAA debt rating as unassailable.
The European Financial Stability Facility, or EFSF, which was set up in May last year to protect vulnerable eurozone nations, could see its debt downgraded too.
Its current triple-A rating enables the fund to raise financing in the bond market with much lower interest rates than bailed-out nations would get on their own.
EU politicians have long protested the power of the ratings agencies and some denounced S&P's moves as a bid to deflect attention away from the United States' much bigger -- and potentially even more dangerous -- debt mountain.
But leading politicians tried to take it in their stride.
German Finance Minister Wolfgang Schaeuble, speaking in Vienna, argued the warning would provide the "best incentive possible" for leaders "to do what they have all promised to do, so that the necessary decisions are taken in order to win back gradually the trust of investors worldwide".
The downgrade threat came just hours after German Chancellor Angela Merkel and French President Nicolas Sarkozy thrashed out strict new rules for fiscal discipline which they hope will finally end the region's woes.
EU leaders will discuss the proposals, which Merkel and Sarkozy want to be enshrined into a rewritten European Union treaty, at a two-day summit in Brussels from Thursday.
But British Prime Minister David Cameron warned Tuesday he would block a new European Union treaty if London's demands are not met, increasing the likelihood France and Germany will end up pushing for a deal among the 17 countries that share the euro.
EU president Herman Van Rompuy and Commission chief Jose Manuel Barroso will also raise at the summit the controversial idea of issuing so-called eurobonds backed by all eurozone members, which Germany strongly opposes.
Lawmakers in debt-plagued Greece early Wednesday approved a 2012 budget pledging tough fiscal goals demanded by EU partners in return for fresh loans.
Caretaker Prime Minister Lucas Papademos had earlier described the budget as a key first step in a process to reverse disastrous fiscal policies that have burdened each Greek with over 30,000 euros ($40,000) in state debt.
Diplomatic sources in Brussels said intense talks were under way between eurozone nations to find ways of bolstering their financial firewall ahead of the European Union summit.
S&P said it would monitor the meeting to see if the outcome is likely to restore confidence in the 17-member eurozone.
EU leaders acknowledge the eurozone is at risk of breaking up, putting the entire 27-member bloc in potential danger.
But tough budget measures adopted by the new government in Italy eased the pressures somewhat on Monday, though Prime Minister Mario Monti said on Tuesday Italian lawmakers had "little time" to approve the package, warning that Italy would otherwise face bankruptcy.
The head of the eurozone finance ministers, Jean-Claude Juncker, insisted that Europe was "on the way to solving the debt crisis."
Merkel was also defiant.
"On Thursday and Friday we will take the decisions which we consider important, indispensable, for the eurozone," she told reporters at a news conference, without referring to S&P's debt warning directly.
A handful of key US senators will meet with International Monetary Fund chief Christine Lagarde on Wednesday to discuss the way out of Europe's debt crisis, Republican Senator Mark Kirk said Tuesday.