Efforts by the EU authorities to reassert order over the chaotic situation in the euro zone showed signs of tentative progress but a stark warning that a new recession could be in prospect underlined the heightened sense of risk.
As Italian leaders took steps to create a unity government under former EU commissioner Mario Monti, days of political haggling in Greece ended with the selection of former European Central Bank vice-president Lucas Papademos to lead an emergency coalition.
Although the situation remains highly uncertain, officials in Brussels anticipate that the breakthrough in Athens and progress in the talks in Rome will relieve some of the tension in the escalating debt crisis.
However, the European Commission said in a new report that the economic recovery in Europe had ground to a halt. "The outlook is unfortunately gloomy," said economics commissioner Olli Rehn.
"The forecast is in fact the last wake-up call. The recovery has now come to a standstill and there's the risk of a new recession unless determined action is taken."
The forecast, which upgraded Ireland's growth prospects this year while reducing them for 2012, comes amid acute concern about Italy.
As British prime minister David Cameron said the country posed a "clear and present danger" to the euro zone's future, the European Central Bank was said to be aggressively buying Italian bonds in a bid to bring down its borrowing costs.
The intervention helped bring the interest rate on Italian 10-year bonds back below 7 per cent yesterday after it rose to levels deemed unsustainable for a country that needs to borrow €300 billion in the next year.
The country's president Giorgio Napolitano has asked Mr Monti, a respected economist, to remain in Rome over the weekend as efforts intensify to form a new government after the announced departure of prime minister Silvio Berlusconi.
While Germany and France each denied yesterday that they have discussed plans for euro zone stragglers to drop out of the single currency, Reuters said it stood by a report that the two countries have discussed closer integration between a "core" of euro zone countries.
"We only have one goal, that is to bring about a stabilisation of the euro zone in its current form," said German chancellor Angela Merkel.
In Brussels, the commission's top civil servant, Irishwoman Catherine Day, said big changes to the euro zone rulebook – including amendments to EU treaties – would have to be agreed by member states if they were to avoid repeating the crisis.
Such a move would likely require that a referendum be held in Ireland.
