Merkel, Sarkozy meet to tackle differences over euro crisis

French President Nicolas Sarkozy and German Chancellor Angela Merkel gesture as they address a news conference at the Chancellery in Berlin, June 17, 2011.

BERLIN (Reuters) - German Chancellor Angela Merkel will thrash out differences with French President Nicolas Sarkozy Sunday over how to use the euro zone's financial firepower to counter a sovereign debt crisis threatening the global economy.

With the turmoil threatening to spiral into financial meltdown as the value of banks' sovereign bond holdings slide, Merkel and Sarkozy are likely to discuss in Berlin both how to manage Greece, prevent contagion and strengthen lenders.

The implosion of Belgian lender Dexia, the first victim of the crisis, has added a sense of urgency to the talks.

"Dexia will be among the topics that will be discussed but the main topic is Greece and the euro zone, as banks are only a consequence" of the crisis, a source at the French finance ministry told Reuters.

Sarkozy is due to arrive in Berlin late Sunday afternoon and hold a meeting with Merkel followed by a working dinner.

Talks are continuing over a vital aid tranche for Greece, which could run out of cash as soon as mid-November.

"There is a high risk that this crisis further escalates and broadens," German Finance Minister Wolfgang Schaeuble was cited as saying by a newspaper Sunday.

BOLSTERING BANKS

Germany and France have so far been split over how to recapitalise Europe's banks, which Ireland estimated Saturday may need more than 100 billion euros ($135 billion) to withstand the sovereign debt crisis, while the International Monetary Fund (IMF) has said the banks need 200 billion in additional funds.

Paris wants to tap the euro zone's 440 billion European Financial Stability Facility (EFSF) to recapitalise its own banks, while Berlin is insisting the fund should be used as a last resort.

Another key dispute is how to use the EFSF to buy sovereign debt to prevent contagion of the crisis, particularly crucial if Greece fails to secure its next aid tranche.

France does not want to set guidelines for the EFSF on the matter, whereas Germany wants to limit the sum used for each member state and set a time limit for bond purchasing, Handelsblatt reported.

"Given that the EFSF is limited overall, it makes sense also to limit the purchases on the secondary market for each country," Michael Meister, deputy parliamentary leader of Merkel's conservatives, told Reuters Saturday.

There was a danger, otherwise, the funds could be quickly used up, he said.

The two euro zone heavyweights have come under pressure worldwide to resolve Europe's crisis which is roiling markets. U.S. President Barack Obama Thursday urged Europe to "act fast," calling the common currency bloc's crisis the largest obstacle to the United States' own recovery.

World Bank President Robert Zoellick told Wirtschaftswoche magazine there was a "total lack" of vision in Europe and Germany in particular needed to show more leadership.

Merkel will visit Vietnam and Mongolia this coming week.

(Additional reporting by Yann Le Guernigou; Editing by Louise Ireland)