George Osborne warns over eurozone fears

After holding talks with counterparts in Brussels yesterday, the Chancellor insisted decisive action was needed to ensure the markets had confidence in bail-out mechanisms.

The ministers had been intending to discuss a second package for Greece, but the gathering has been overshadowed by the Italian government's efforts to agree austerity measures.

Prime Minister Silvio Berlusconi has insisted the estimated £42 billion of savings will return his country's finances to "significant surplus" if passed by MPs.

However, Mr Berlusconi prompted more market jitters by delivering a veiled attack on the credentials of his own Treasury minister Giulio Tremonti.

Mr Osborne, who joined eurozone ministers for yesterday's talks, said the UK was seen as a "safe haven" from the turmoil thanks to the Government's spending cuts.

"The time has come for decisive action to address the crisis in the eurozone and prevent market uncertainty doing real damage to the world economy," he said last night.

"Eurozone countries should now set out in detail how they plan to expand the scale of the financial tools at their disposal, carry out credible stress tests backed up with recapitalisation for the most vulnerable banks, involve the private sector to make Greece's debt burden more sustainable, earn fiscal credibility through concrete action to reduce excessive deficits, and push forward structural reforms to boost growth.

"The results of the action that Britain has taken are plain to see - despite having inherited one of the largest budget deficits our long-term interest rates are among the lowest in Europe.

"We are seen as a safe haven in the financial storm, but we are not immune to the instability on our doorstep."

The eurozone ministers in Brussels assessed the details of another bail-out for Greece - considering even a partial default by the country involving bondholders extending credit deadlines to ease the burden.

However, Italy, as the EU's third largest economy, could pose far more significant problems if austerity measures fail to bite.

If Spain needs help too, the current size of a new proposed EU bail-out fund due to be agreed this month may not be enough.

The fund - the European Stability Mechanism - involves only eurozone countries in future bail-outs and is fixed at about £440 billion.

The only concrete conclusion from the Brussels talks was an agreed statement reaffirming a combined commitment to maintain "financial stability" in the euro area.

But one official at the talks said: "Whatever we say or do, we are at the mercy of how market speculators interpret what is going on."