Angela Merkel rejects urgent aid pleas by Spain and Italy

Pleas from Spain and Italy for urgent financial aid from the eurozone to bring down borrowing costs were dismissed by Angela Merkel as divisions hardened on the eve of a critical summit.

Germany's chancellor angrily rejected desperate pleading by Italy and Spain as a Franco-German rift over eurozone debt sharing threatened to unravel efforts to find a fix for the single currency at a meeting of European leaders on Thursday.

Before flying to Paris last night for emergency talks with Francois Hollande, the French president, Merkel told German MPs that instead of more cash, the eurozone needed to step up debt reduction and economic reforms.

"I fear that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures," she said.

Mariano Rajoy, the Spanish prime minister, said that he would plead with other leaders to allow euro bail-out funds or the European Central Bank to stabilise financial markets by helping to reduce borrowing costs, running at nearly 7% for Spain.

"We can't keep funding ourselves for a long time at the prices we're currently funding ourselves," he said.

"There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries."

As Spain's central bank warned that recession would deepen there in the second quarter, official figures showed the government's deficit had reached 3.41% of GDP in the first five months of the year, close to its total 2012 target of 3.5%.

Mario Monti, the Italian prime minister, warned his country's MPs on Tuesday that he would block agreement at the summit unless emergency measures to reduce borrowing costs were agreed.

Yesterday Italy had to pay investors substantially higher rates of return at a short-term bond auction, reflecting investor fears that the summit would not produce satisfactory measures.

"Monti needs to go back to his parliament with a promise of EU help to reduce bond yields.

"If not he will have trouble with MPs and if there is political chaos in Italy then we're in real trouble," said a senior eurozone official.

But last night senior EU officials warned that there would be no quick summit decisions to allow bond purchases or direct recapitalisation of banks by euro bail-out funds.

For the first time in the eurozone crisis, France and Germany are at loggerheads over President Hollande's call for eurobonds to share the eurozone's debt burden, a disagreement that is paralysing decisions.

Olli Rehn, the EU's economic and monetary affairs commissioner, called for urgent action to break a new "negative spiral" in the crisis.

"We need to be ready to consider more immediate measures to stabilise financial markets, especially government bond markets," he said.