France, Germany near rescue fund deal - The Guardian

But a senior euro zone source has been reported by Reuters news agency, that there had been no mention of such a deal.

Earlier, German Chancellor Angela Merkel warned that leaders would not solve the debt crisis at one summit meeting.

The Guardian, citing senior European Union diplomats, said the euro zone would endorse a five-fold increase in the €440 billion bailout fund, giving it some two trillion euros to help troubled governments and banks survive should Greece or any other troubled euro zone country default.

The paper said confidence that the plan would be approved at next Sunday's crisis summit was on the rise after Moody's warned it might put France's top AAA credit rating on review, citing the cost of bailing out troubled banks or other members of the euro zone.

U.S. stocks and the euro rose on the report, though traders said they were taking a wait-and-see approach.

If true, the news "would be what the market's been looking for, and two trillion seems to be in the right neighbourhood," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey,

But, he added, "I have to take it with a grain of salt. We've seen a lot of these European reports that something was imminent only to be disappointed the next morning."

Markets have been on edge for fear European leaders would not agree on a plan to address the crisis, which has already forced Greece, Ireland and Portugal to seek bailouts and has driven up borrowing costs in Italy and Spain.

Moody's Investors Service yesterday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stress.

European banks with heavy exposure to troubled sovereign debt have also found it harder to fund operations, sparking fear that governments may have to bail them out.

According to the Guardian report, France and Germany agreed that Europe's banks should be recapitalized to meet the 9 percent ratio the European Bank Authority is demanding after having examined the exposure levels of between 60 and 70 "systemic" banks.

While French and German banks are said capable of meeting the new capital ratio on their own, other countries' banks may need help from the state or the expanded bailout fund, known as the European Financial Stability Fund, the paper reported.

Berlin and Paris are also said to be closer to agreement on increasing private sector involvement in a second €109 billion rescue for Greece. The voluntary "haircut" for bond holders was set at 21 percent in July but worsening financial conditions have spurred Germany to push for private creditor losses of up to 50 percent.