Europe hits the panic button

As Europe scrambled to head off pressure on the single currency zone, on Friday the Italian Prime Minister, Silvio Berlusconi, said after telephone talks with the French President, Nicolas Sarkozy, that G7 finance ministers would meet "in a few days".

"The situation is very difficult and requires co-ordinated action. We have to recognise that the world has entered a global financial crisis that concerns all countries," Mr Berlusconi said after talks with several European leaders.

Italy, which along with other euro giant Spain is in the eye of a financial storm, will speed up implementation of a package of austerity measures aimed at achieving budget balance, Mr Berlusconi said.

Italian shares plunged over 13 per cent last week, while investors, scared the country's slow growth means it will get caught up in a debt trap, sold off their bonds, sending rates of return over 6 per cent.

The European Central Bank, however, agreed to start buying up Italian bonds from tomorrow in return for a promise from the government to accelerate deficit cuts, said Italy's Federalism Reforms Minister, Umberto Bossi.

"Everyone is afraid our bonds will turn into scrap paper but, by returning to budget balance one year early, the ECB has guaranteed that from Monday it will buy our bonds," he said.

The US President, Barack Obama, has discussed the crisis with Mr Sarkozy and the German Chancellor, Angela Merkel, in separate calls.

The EU's economic affairs commissioner, Olli Rehn, announced he would propose new common "Euro-bonds" next month.

Until now taboo, these would allow eurozone governments to raise funds needed to run their countries based on guarantees from the entire 17-country bloc.

Dr Merkel, the Spanish Prime Minister, Jose Luis Rodriguez Zapatero, as well as Mr Sarkozy, Mr Berlusconi and David Cameron, the Prime Minister of Britain, which does not have the euro, had a flurry of phone discussions.

On Thursday thousands marched through the streets of Madrid against the use of force by police on demonstrators who rallied at the interior ministry to protest against the closure of the city's main square.

The "indignant" movement began when people set up camp in the Puerta del Sol square before of May 22 elections to protest against what they saw as government ignoring the needs of ordinary people.

The vast protest "village" was dismantled on June 12 but members of the 15-M movement have since staged regular protests.