The European Central Bank left its key interest rate unchanged at 4.25 percent as its president delivered a bleak assessment that EU growth was weakening amid high inflation and fears of a widening financial crisis.
The financial crisis has pushed the euro to a 13-month low against the dollar
European Central Bank President Jean Claude Trichet said the bank's governing council decided unanimously to leave its refinancing rate at 4.25 percent but first weighed up their choices.
"With the weakening of demand, upside risks to price stability have diminished somewhat, but they have not disappeared," Trichet said on Thursday, Oct 2, in a monthly news conference.
Trichet delivered a somber message
Euro zone inflation has also fallen to 3.6 percent, though it remains well above the ECB's target of just below 2 percent.
Trichet said ECB policymakers recognised "the extraordinary high level of uncertainty stemming from latest developments" on turbulent financial markets and the credit crunch. "Economic activity in the euro area is weakening with contracting domestic demand and tighter financing conditions," he said.
European stocks tumble
The financial crisis has brought the world to an extraordinary level of uncertainty and governments must respond with equally unprecedented measures, Trichet said Thursday.
"Nothing in the past resembles what we are currently seeing," he told France 24 news channel. "We are witnessing events that we have not been seen since World War II."
European stocks fell Thursday amid news of bleak US economic data and jitters as the US House of Representatives votes on a massive $700 billion bailout.
Market turmoil has caused much anguish at stock exchanges in Europe
Around Europe, Germany's DAX index was down 2.5 percent, UK's FTSE 100 index fell 1.8 percent and France's CAC 40 dropped 2.3 percent.
Asian markets too took a new hammering amid uncertainty about the next stage of the US package.
The Bank of Japan injected another 1.6 trillion yen ($15 billion, 10.7 billion euros) into the financial system -- its 12th straight daily injection.
Eurogroup chief Jean-Claude Juncker called European officials to "put in place a more systematic defense strategy" to protect the 27-nation European Union (EU) from banking failures, rather than be satisfied "with case by case reactions."
He said the subject would be discussed Saturday in Paris during a meeting of representatives from Britain, France, Germany and Italy along with European Commission president Jose Manuel Barroso, Juncker himself, and Trichet.
Germany, France joust over alleged French bailout plan
Meanwhile, amid calls by the EU Commission on Wednesday for stronger pan-European cooperation to tackle a raging credit crisis that has lashed banks on the continent, France and Germany were at loggerheads over the idea of a US-style bail out for Europe.
French Finance Minister Christine Lagarde told German business daily Handelsblatt that a "European safety net" could be needed to prevent a bank in a smaller EU country from going bankrupt.
"What happens if a smaller EU state is hit by looming bank collapse? Maybe this country does not have the means to save the bank. Therefore the question of a European safety net solution comes up," Lagarde told the paper.
The comments came ahead of a proposed meeting on the financial crisis by the leaders of Europe's four biggest economies in Paris on the weekend. France currently heads the EU's rotating presidency.
News reports quoted a European official, who did not wish to be named, saying that Paris had floated the idea of a 300 billion euro ($440 billion) rescue fund but Lagarde denied the statement from the source in Berlin that her government wanted the huge rescue package. "There is no such a thing," Lagarde told BBC television after being asked about the reported proposal.
Merkel has ruled out issuing "blank checks" to banks
Whether there is or was ever a French bail-out plan, Germany was quick to reject the idea regardless.
"Germany does not think much of such a plan," German finance ministry spokesman Torsten Albig told AFP.
Earlier, Chancellor Angela Merkel said Germany "cannot and will not issue a blank check for all banks, regardless of whether they behave in a responsible manner or not."
Barroso calls for more "credibility" in EU efforts
EU Commission President Jose Manuel Barroso said Wednesday Europe needs to "inject credibility" into its efforts to tackle the current financial crisis, as a major US banking bailout hangs in the balance.
Barroso says Europe needs more coordinated regulatory measures to tackle the crisis
"We are asking and urging member states for closer cooperation. It is critically important for confidence in the markets," Barroso said.
Barroso said the existing system of regulation, based largely on national governments and regulators, could cope with the current crisis, but the European Union needed to go further in coordinated action to restore full confidence.
"We need a further strengthening of the supervision structures at European level," he told a news conference on Wednesday.
Rebuffing French calls for EU limits on state aid to be suspended or revised in the light of the crisis, Barroso said upholding the competition rules was vital, but the Commission would apply them flexibly.