French President Francois Hollande led a rebellion against Germany's prescriptions for dealing with the debt crisis, rattling Europe's political system with demands for immediate relief for hard-hit countries.

Hollande put French endorsement of a German-inspired, deficit-control treaty on hold, and Italy and Spain withheld approval of a €120 billion ($190.5 billion) growth-boost package unless Germany authorised steps to calm their bond markets.

By provoking an open breach with German Chancellor Angela Merkel, the new French leader overturned the austerity-first consensus that has dominated the debt crisis response and risked fracturing the Berlin-Paris alliance that built the European Union and the euro.

"Stability measures should be a priority before any other considerations," Hollande said at a summit in Brussels.


As the talks dragged on, a group of senior officials from national finance ministries grappled with whether to use the bond-buying powers of the bloc's bailout funds to try to trim Italy's 10-year yields from 6.2 per cent and Spain's from 6.94 per cent.

Leaders of the 10 EU countries outside the euro left the summit, leaving the 17 euro chiefs to deliberate. Hollande said German concessions would determine whether he agreed to the deficit-reduction pact, which was endorsed by his predecessor Nicolas Sarkozy, by the time the summit ended.

With global powers from the US to China calling for Europe to take decisive steps, the clash added to doubts whether the euro's custodians could muster the will to use what EU President Herman Van Rompuy dubbed "better fire-brigade equipment" when the anti-crisis tools were strengthened last year.

"Incremental" policies no longer work, Canadian Finance Minister Jim Flaherty said yesterday. European leaders must "quickly begin to implement the bold actions that they understand are needed".

Beset with the euro area's second-highest debt load at 120.1 per cent of GDP, Italy on Thursday paid the most since December to sell 10-year bonds. Italian yields have jumped 50 basis points since Spain requested bank aid on June 9 amid concern that Italy was next in line.

Spanish Premier Mariano Rajoy has asked that aid be channelled directly to the troubled lenders, while Italian Prime Minister Mario Monti argues Italy's debt is a legacy of policy errors in the 1970s and 1980s.

He says steps such as a labour-market reform passed in Italy this week will generate the growth and tax receipts to pay it down.

Monti, a non-partisan former European Commission official who was appointed Prime Minister last year, said Italy's deficit cuts and surplus before interest costs made it worthy of a European backstop.


"If public opinion sees that bad signals, not good signals, are coming back from the markets, people might be discouraged and political forces which say let European integration, let the euro, let this or that country go to hell, might prevail," Monti said on the eve of the summit.

As Europe's dominant economy, Germany can control the use of the aid funds, the temporary European Financial Stability Facility, set up in 2010, and the European Stability Mechanism, a permanent fund to be phased in starting next month.

German lawmakers were to vote yesterday on both the mechanism and the fiscal pact that set down new EU budget rules, leaving Merkel little room to manoeuvre.

While €500 billion in fresh money is available, the eurozone has already pledged as much as €100 billion to recapitalise Spain's banks and a further €10 billion for Cyprus.

Those programmes would bring to five the number of countries tapping European assistance. Watching from the sidelines is the European Central Bank, which bought €219.5 billion of ailing countries' bonds until suspending purchases in February under pressure from Germany.

Hollande stood with the struggling countries on the periphery, breaking with the close coordination between France and Germany that marked the first two years of the crisis that was spawned in Greece in 2009.

Hollande was a driving force behind the growth package, which includes a €10 billion capital boost for the European Investment Bank, the EU's project-financing arm.

While the new French Government strayed from the German line, Merkel wasn't alone. She counted Finland and the Netherlands, two other countries that have retained top credit ratings, as allies amid taxpayer unease with further bailouts.

- Bloomberg