Europe's leaders scrambled Friday to reassure investors the continent's banks were safe, stepping up calls for fresh cash injections as Paris played down reported differences with Germany over the crisis.
While EU leaders agree on the need for action to shore up over-exposed banks, a division of opinion reportedly emerged between France and Germany on how to proceed, two days before their leaders are due to meet in Berlin.
In recent days, the focus of the eurozone crisis has shifted from Greece's efforts to manage its debt to the plight of banks in countries like France who hold large amounts of bonds issued by Greece and other weaker eurozone states.
The International Monetary Fund has estimated that Europe's banks may need between 100 to 200 billion euros to cover potential losses.
Highlighting the urgency of the task, ratings agency Moody's downgraded a dozen British banks over concerns government support for lenders could be withdrawn.
The debt crisis, which began in Greece, has snared Ireland and Portugal and put Italy and Spain in the firing line too, threatening to sink the whole euro project as banks exposed to their debt find it impossible to raise funding.
Fears of a resulting "credit crunch" have raised the spectre of a replay of 2008 when US giant investment bank Lehman Brothers collapsed, nearly taking the global financial system with it but for massive government support.
German Chancellor Angela Merkel, whose country is Europe's paymaster, insisted Friday that under-pressure banks must first turn to investors for funds before appealing for national or European cash.
"First the banks must try and get capital for themselves," she said at a joint press conference with visiting Dutch Prime Minister Mark Rutte.
"If this is unsuccessful, then national instruments should intervene, as was the case in 2008 and 2009.
"Only if a country cannot do this with its own means, then the EFSF facility can be used as an option, but on the condition that the country undertakes its own structural reforms," she added, referring to the EU's bailout fund.
France, where major lenders are seen as overexposed to risky Greek, Spanish and Italian debt, urged European governments to work together on a plan to recapitalise banks, admitting that some French banks were in need of finance.
Diplomats said France, in fear of losing its top notch AAA credit rating, would prefer to recapitalise banks with the 440-billion-euro EFSF.
However, a finance ministry official insisted that France and Germany saw eye to eye on the need for new private sources of capital to be tapped first before state funding would come into play.
It followed reports that Paris was keener on using public funds than Berlin, but the official said this would be a "last resort."
"There are several options in terms of public finance but we have not yet discussed this at a European level" he added.
The European Commission said it would offer a framework in "coming days" for EU nations to recapitalise banks caught up in the eurozone debt crisis in a coordinated fashion.
The European Central Bank announced new measures Thursday to provide cash-strapped banks with liquidity while the Bank of England said it would pump £75 billion into the economy, hoping to boost credit.
However, official data in Frankfurt showed overnight deposits at the ECB made by eurozone banks hit a fresh 2011 peak Thursday for the fifth day running, a signal of a growing credit crunch as the banks become more reluctant to lend to one another.
Merkel meanwhile said Germany "absolutely supports" a Dutch proposal to appoint a separate European commissioner purely to ensure that eurozone nations abide by the bloc's budget rules.
And in Athens, Germany's economy minister Philipp Roesler called for more stability in the eurozone to deal with debt turbulence as Greece pledged to fully repay its EU loans.