European finance ministers are considering making banks take bigger losses on Greek debt and have delayed a vital aid payment to Athens until mid-November, setting up a crunch point in the euro zone's sovereign debt crisis.

Bank shares took a further sharp tumble today, leading a broader stock market retreat, after the 17 euro zone ministers, meeting in Luxembourg, called for a review of a July 21st debt swap agreement with private bondholders.

At close European shares flirted with a 26-month low - with the banking sector (down 4 per cent) among the top decliners. The sector has now slumped 36.4 per cent this year.

Minister for Finance Michael Noonan said: “I think it’s apparent that some European banks will have to be recapitalised but the initiative has to come from their own governments and their own finance ministers,”

“I think there are some small banks in Europe certainly that need to be recapitalised. That was clear from the latest round of stress tests, but that’s a matter for the individual governments and for the monetary authorities,” he told reporters as he left the two-day meeting in Luxembourg.

The delay in disbursing an €8 billion loan instalment, which Greece had said was needed to pay October  salaries and pensions, and the revisiting of the private sector deal raised the chance of a Greek default as soon as the currency area has new financial fire-fighting tools in place, analysts said.

"The market is increasingly worried about the potential of the Greek crisis and the calamity that could be created if there was a messy default," said Jane Foley, senior currency strategist at Rabobank.

The euro hit a nine-month low against the dollar and a 10-year low against the yen.

Investor confidence was also hit by deepening trouble at Franco-Belgian bank Dexia, a municipal lender with big holdings of Greek and other peripheral euro zone debt, whose shares plunged by over 20 per cent today after losing 10 per cent yesterday.

The French and Belgian finance ministers said in a joint statement that Paris and Brussels and their central banks would take all necessary measures to safeguard Dexia's account holders and creditors.

Jean-Claude Juncker, chairman of the 17-member eurogroup, said ministers were reassessing the extent of private sector involvement in a planned €109 billion second rescue package for Greece which may now prove insufficient after Athens admitted it would miss key deficit targets.

Under the July deal, private creditors agreed to take a 21 per cent write-down on their Greek holdings via a plan to lighten and stretch the debt burden, with euro zone governments funding credit enhancements to attract voluntary participation.

Now that Greece's economic growth and deficit situation has worsened, that deal needed to be reviewed, Mr Juncker said. "As far as the PSI (private sector involvement) is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on July 21st, so we are considering technical revisions, so yes," Mr Juncker told reporters. He would not elaborate.

France, whose banks stand to lose most from a Greek default, urged all sides to stick to the original deal.

"We have the July 21st agreement. We have to implement it, we have to keep working on it. Today Greece needs to make an effort, needs to keep moving," French government spokeswoman Valerie Pecresse said.

Mr Juncker also disappointed analysts by saying the ECB was not the main avenue being explored to increase the firepower of the euro zone's rescue fund.

His comment, reflecting strong German opposition to using the ECB to leverage up the European Financial Stability Facility (EFSF), raised doubts that the bailout fund can be sufficiently scaled up to calm febrile markets.

The US has urged the euro zone to leverage its €440 billion rescue fund to buy government bonds from the market, recapitalise banks and extend precautionary credit to sovereigns but political resistance to pouring more public money into bailouts is growing across northern Europe.

In Athens, striking public sector workers blockaded the entrance to several ministries on the second anniversary of the ruling Socialist party's election victory, disrupting talks with EU and IMF inspectors on the next aid tranche.

Despite more than six hours of talks yesterday, the euro zone meeting produced few concrete steps to tackle the deepening sovereign debt crisis, raising expectations that Greece will end up having to default on its €357 billion of debts.

All roads now point to mid-November.

The only minor advance was a deal resolving a dispute over Finnish demands for collateral from Greece in return for new loan guarantees. The terms were complex and seemed designed to deter other countries from seeking such special conditions.

A tentatively planned finance ministers' meeting on October 13th, expected to have signed off on the next payment to Greece, was cancelled, giving EU and IMF inspectors several more weeks to report back on Athens' austerity measures and lagging economic reforms and privatisations.

"Greece told us that the funds will have to be made available during the second week of November," Belgian finance minister Didier Reynders said. "We reviewed the Greek plan and we will now wait for the final report from the troika since we have time to decide."

Euro zone parliaments are expected to complete approval of new powers for the EFSF rescue fund by mid-October, giving it scope to intervene on bond markets and help recapitalise banks.

Greece's admission on Sunday that it will miss its deficit target this year despite ever deeper cost-cutting measures provoked a sharp sell-off in stock markets and raised new doubts over the proposed second bailout.

Economists and market analysts have long said the July deal was insufficient to make Greece solvent and forecast that Athens would have to default within months.

Greece's draft budget sent to parliament yesterday showed this year's deficit would be 8.5 per cent of gross domestic product, well above the 7.6 per cent agreed in Greece's EU/IMF bailout programme, the benchmark for future EU aid.

Compounding the debt problem, the economy is set to shrink by a further 2.5 per cent next year after a record 5.5 per cent contraction this year.

The deeper-than-forecast recession means public debt will be equivalent to 161.8 per cent of GDP this year, rising to 172.7 per cent next year, by far the highest ratio in Europe.

The likelihood that Greece's funding needs next year will be greater than forecast when the second rescue package was agreed in principle in July has reopened a fraught battle over who should pay - taxpayers or financiers.

EU and German officials have suggested the creditors' "haircut" may have to be increased to as much as 40 or 50 per cent.

Additional reporting: Reuters