[WATCH] Sarkozy urges Europe to battle 'unprecedented crisis'

European Central Bank chief Mario Draghi also warned the eurozone was "in a very grave state of affairs" and urged reducing reliance on ratings agencies.

Sarkozy, the first foreign leader to meet with Spain's new centre-right Prime Minister Mariano Rajoy, said the eurozone must improve competitiveness to boost growth as well as simply slashing spending.

"We are confronted by an unprecedented crisis that forces us to cut spending, lower our deficits but also to find the path to new growth by resolving our competitiveness problems," Sarkozy said.

The French leader warned against panic after Standard & Poor's Friday cut the credit rating of nine nations, stripping France of its top-notch AAA rating, slicing Spain's and Italy's ratings by two notches, but sparing Germany.

Moody's Investors Service soothed some of the pain, confirming France's AAA rating while reviewing its "stable" outlook.

"Fundamentally it changes nothing," said Sarkozy, who was visiting Madrid to be honoured by King Juan Carlos for his help in fighting armed Basque separatists ETA.

Draghi ownplayed the importance of ratings agencies in comments at the European Parliament in Strasbourg.

"I think what we should do is to learn either to do without them or with them but to a much more limited way than we do today," he said.

Indeed, there seemed little sign of concern on financial markets, where news of the downgrades had already been telegraphed on Friday.

But Sarkozy said talks planned for Friday between the leaders of France, Germany and Italy were being postponed until February because they had been in contact recently anyway.

"We stand together, the road ahead is clear: less spending, less deficits, more growth and competitiveness," said Sarkozy, who is facing an uphill battle for re-election in April.

S&P last night downgraded the European Financial Stability Facility (EFSF) by one notch to AA in line with its downgrades of France and Austria as it uses guarantees from top-rated eurozone members to raise funds on the market to lend to troubled countries.