Finance ministers and central bankers from the world's leading industrialised nations (G7) have agreed to set up a Financial Stability Forum to watch for warning signs of potential turmoil in the international financial markets.

But a German proposal to link the euro, the dollar and the yen in an exchange rate mechanism found little favour and the G7 Ministers made no firm proposals for easing the debt burden of the world's poorest countries.

Meeting in Petersberg Castle high above the Rhine on Saturday, the ministers discussed the state of the world economy and agreed that although the outlook in North America remains broadly favourable, growth in the euro zone this year will be slower than expected. Gloomy economic data from Germany and France last week encouraged a fall in the euro against the dollar. But ministers and central bankers disagreed about the significance of the euro's slide.

The Bundesbank President, Mr Hans Tietmeyer, said that Europe's central bankers would not follow a policy of "benign neglect" towards exchange rates and he left little doubt about his own assessment of last week's fall.

"I would simply say that the euro is certainly not over-valued at present," he said.

But the German Finance Minister, Mr Oskar Lafontaine, expressed satisfaction at the drop in the value of the euro which he hopes will boost European exports.

"I cannot recognise in the present euro rate a disadvantage for European industry," he said.

Mr Lafontaine, who describes the financial markets as a casino advocates establishing "target zones" to limit exchange rate fluctuation between the euro, the dollar and the yen. Japan supports the idea but French ministers have begun to distance themselves from the proposal which is flatly rejected by Britain and the United States.

The US Treasury Secretary, Mr Robert Rubin, insisted that although the ministers agreed to co-operate "as appropriate" in preventing excessive volatility in the exchange rates of major currencies, there was no question of establishing an exchange rate mechanism.

"The key to stability is in economic fundamentals" he said.

Mr Rubin warned his European colleagues that the US could not continue indefinitely in the role of the consumer of last resort for the world economy. He called on the euro zone economies to take urgent steps to improve growth so that Europe could help to absorb the exports Asia will need to sell if it is to recover.

The only substantial decision taken by the ministers was to establish a Financial Stability Forum to encourage global financial regulators to co-operate more closely. Proposed by Mr Tietmeyer, the forum will be made up of senior G7 officials as well as representatives from international institutions and regulatory bodies.

Although the forum represents an attempt to prevent the sudden huge capital flows that contributed to the crises in Asia, Russia and Brazil, Mr Tietmeyer insisted that it is aimed at enhancing the market rather than controlling it.

"Ultimately the process of strengthening co-operation should make a significant contribution to a better functioning of the financial market. This will make possible a full utilisation of the considerable benefits which free capital movements provide to all participants in the global financial system," he said.

Although some details about the forum remain to be agreed it is expected to be headed by Mr Andrew Crockett, the general manager of the Bank for International Settlements in Basle.

The forum which will probably number about 45 people, is expected to meet twice a year and will operate from Basle with a small staff.

"The forum would meet as often as needed to achieve its objectives. Initially two meetings a year could be envisaged. The first meeting of the forum could be held in spring, 1999" Mr Tietmeyer said.

The ministers called for improvements in the arrangements for debt relief for the world's poorest countries and looked at ways of making relief available more quickly.

But they did not agree on any concrete steps and their proposals fall short of cancelling the debts of the poorer countries, a measure advocated by a growing coalition that includes such figures as Bono, Madonna, Michael Jackson and the Pope.

The G7 countries are the United States, Japan, Canada, Germany, France, Britain and Italy.