The optimism of recent weeks swung decidedly back to pessimism, with stocks falling and the cost of borrowing for several major European countries rising sharply.
In Frankfurt, the European Central Bank lowered interest rates for the second time in a little more than a month, signaling that it wants to help slowing economies. But the bank dashed hopes that it might ramp up its bond-buying program to contain the sovereign debt crisis, as many have urged it to do to relieve intense market pressure on countries like Italy.
Late Thursday, European leaders here were circulating the draft of a new “fiscal compact” for the currency union, including tighter control of public finances. Disagreement persisted about whether any deal would cover all 27 European Union member states or just the 17-member euro zone, and about whether it would involve amendments to the euro treaty. Leaders were also discussing whether a permanent bailout fund, set to begin operation as early as July, should function as a licensed banker.
Earlier in the day in Washington, President Obama voiced frustration that Chancellor Angela Merkel of Germany and other European leaders were focusing on the wrong problem by negotiating long-term changes to the euro treaty, rather than reassuring the markets and staving off a recession by taking bold short-term action.
“If we see Europe tank, that obviously could have a big impact on our ability to generate the jobs that we need here in the United States,” Mr. Obama told reporters.
“Europe is wealthy enough that there’s no reason why they can’t solve this problem,” he said. “If they muster the political will, they have the capacity to settle markets down, make sure that they are acting responsibly and that governments like Italy are able to finance their debt.”
Adding to the anxiety, European regulators said on Thursday that many of the region’s biggest banks, including the German giants Deutsche Bank and Commerzbank, needed to raise more money as reserves against potential losses.
The amounts to be set aside are much higher than regulators had estimated as recently as October, and the inclusion of German banks in the roundup was a reminder that even the region’s richest nation was not immune from the debt crisis contagion.
President Nicolas Sarkozy of France, in Marseille on Thursday before heading here, said, “If we don’t have an agreement Friday, there won’t be a second chance.”
Mrs. Merkel promised there would be an agreement, but warned that it would take years to overcome the crisis, as Europe built more centralized oversight and discipline.
Mr. Obama said the European leaders’ efforts to reach a long-term “fiscal compact where everybody’s playing by the same rules” were “all for the good.” Yet he added, “But there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”
The best hope for providing that shot of confidence has been seen as the European Central Bank. But the bank’s president, Mario Draghi, at a news conference in Frankfurt on Thursday, seemed to back away from signals he sent last week that a grand bailout bargain might be in the works — a big infusion from the central bank in exchange for a commitment to greater fiscal discipline from the European heads of state.
On Thursday, Mr. Draghi said that he was “surprised” that a speech he made last week had been widely interpreted as meaning the central bank stood ready to shore up weak European Union members like Italy and Spain by buying many more of their bonds — or to possibly work in concert with the International Monetary Fund. He played down the I.M.F. idea Thursday as too “legally complicated” and said it might violate the spirit of the euro treaty.
Many analysts were stunned by what appeared to be Mr. Draghi’s turnaround, which they said would make it even more crucial for the European heads of state to forge a market-calming master plan at their summit meeting — as unlikely as such an outcome is starting to look.
Stocks in Europe and the United States fell on the gloomy signals. The euro currency fell against the dollar, and the borrowing costs of the euro region’s two most closely watched convalescents, Italy and Spain, shot higher in bond trading.
“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” Carsten Brzeski, an economist at the Dutch bank ING, wrote in a note to clients. “According to Draghi, it was up to politicians to solve the debt crisis.”
For now, Mr. Draghi appears to be leaving any government bailouts to the heads of state, while focusing the European Central Bank’s efforts on the less controversial business of keeping money flowing through commercial banks.
Steven Erlanger reported from Brussels and Jack Ewing from Frankfurt. Stephen Castle contributed reporting from Brussels, and Mark Landler from Washington.
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