Stock markets rally at close after volatile day's trading

European shares pared losses and turned positive this afternoon following a dismal week, helped by hopes of further measures from the European Central Bank to ease the region's debt crisis, with French banks strongly recovering.

US markets opened lower but then rebounded.

Most of the major bourses in Europe ended a difficult week in positive territory. The FTSEurofirst 300 index of top European shares closed up 0.7 per cent. The FTSE 100, the DAX and the CAC 40 also ended the week higher while in Dublin, the Iseq index finished up 1.7 per cent to 2407.93.

The Group of 20 leading economies, meeting in Washington, said they would take all the necessary steps to boost market confidence while the euro zone would look at ways to boost the effectiveness of the region's bailout fund. Minister for Finance Michael Noonan is attending.

"They have six weeks to resolve this crisis," said British finance minister George Osborne. Euro zone leaders needed to have the situation under control by the time leaders of the Group of 20 economies meet in France in November, he said.

Pressure is growing on European governments for a recapitalisation of the region's banks - perhaps to strengthen them in preparation for a Greek default.

Policymakers in Europe also seemed to be warming to the idea of giving more firepower to their bailout fund.

"Europe is running against time," Brazilian financial minister Guido Mantega said. "I hope Europe does not wait for the first countries to break before putting new instruments in place because then the bill will be higher."

The head of the International Monetary Fund, Christine Lagarde, said Europe and the grim economic outlook in the United States required a new collective effort or "we run the risk of losing the battle for growth."

Talk of a possible Greek default gained pace today while a pledge by the world's major economies to prevent Europe's debt crisis from undermining banks and the global economy failed to lift financial markets for long.

Greek finance minister Evangelos Venizelos was quoted by two newspapers as saying an orderly default with a 50 per cent haircut for bondholders was one of three possible scenarios for resolving the heavily indebted euro zone nation's fiscal crunch.

Officials played down the reports and Mr Venizelos described them in a statement as an unhelpful distraction from the central task of sticking to Greece's EU/IMF bailout programme.

ECB governing council member Klaas Knot told a Dutch daily a Greek default could no longer be ruled out, the first ECB policymaker to speak openly of the prospect.

"It is one of the scenarios," Dutch daily Het Financieele Dagblad quoted him as saying. "All efforts are aimed at preventing this, but I am now less certain in excluding a bankruptcy than I was a few months ago."

More signs emerged today that European governments are working on recapitalising vulnerable banks - perhaps in preparation for a Greek default - with France's top market regulator saying 15 to 20 banks needed extra capital, although no French ones "at this stage".

ECB policymakers said banks could be primed with long-term one-year liquidity to help shore them up.

The European Commission said European banks had already received €420 billion in funds since 2008 and were in much better shape than three years ago.

"The recapitalisation of European banks is something that is ongoing, it is something that is already happening," Commission spokesman Olivier Bailly told a regular briefing.

More signs emerged that European governments are working on recapitalising vulnerable banks, with France's market regulator saying 15 to 20 banks needed extra capital, although no French ones "at this stage".

The European Commission said European banks had already received €420 billion in funds to help recapitalise since 2008 and were in much better shape than three years ago.

A statement issued after G20 talks in Washington said the 17-nation euro zone would implement "actions to increase the flexibility of the EFSF and to maximise its impact" by mid-October.

But it left unclear whether they would go beyond an already agreed widening of the bailout fund's powers, which has so far failed to reassure investors.

"Imagine there's no sovereign default . . . . then ... capital is absolutely fine. However, if there's a sovereign default or they are forced to mark their existing positions to market without a default, then that causes capital problems," said Chris Bowie, head of credit at Ignis Asset Management.

Reuters/Bloomberg