(Recasts with ECB, German and French comment, Israel markets)
* ECB to hold emergency meeting on Sunday - sources
* Sarkozy, Cameron confer on US debt downgrade, euro zone
* Obama urges lawmakers to work together on fiscal plans
By Andreas Framke and Paul Taylor
FRANKFURT/PARIS, Aug 7 (Reuters) - The European Central Bank will decide on Sunday evening whether to buy Italian government bonds to try to speed up cuts in euro zone debt, ECB sources said as global leaders conferred by phone on the twin financial crises in Europe and the United States.
After a week that saw $2.5 trillion wiped off global stock markets, political leaders are under pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.
ECB President Jean-Claude Trichet wants the policy-setting Governing Council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures on Friday to speed up deficit reduction and hasten economic reforms, one ECB source said.
The source said that if the ECB council opted to intervene on Italy at a crucial conference call starting at 1700 GMT, the ECB and national central banks would start buying Italian bonds when markets open on Monday.
Another ECB source said the council would also look at possible emergency liquidity measures to prevent money markets freezing.
A third ECB source said the ECB meeting had been put back into the evening to see what measures the Unietd States was ready to take to assuage markets after credit ratings agency Standard & Poor’s downgraded Washington’s AAA rating to AA+ on Friday.
The ECB reactivated its controversial sovereign bond-buying programme last Thursday but has so far purchased only small quantities of Irish and Portuguese bonds, seeking tougher austerity measures from Italy.
Berlusconi’s plans entail moving up a balancing of the budget by one year to 2013, enshrining a balanced budget rule in the constitution and pushing through welfare and labour market reforms after talks with trade unions and employers.
The debt crises on either side of the Atlantic, with the latest shock coming from the U.S. downgrade , are wreaking market turmoil and stoking fears of the affluent world sliding back into recession.
German papers were both incredulous and gloomy on Sunday about the financial upheaval.
Welt am Sonntag dedicated an entire section to global economic uncertainties, entitled “Der Crash” (The Crash) and wrote: “No one could have forseen this dramatic crash and now the situation can only be endured with gallows humour”.
Der Spiegel magazine’s front page featured euro and dollar banknotes going up in flames, with the headline “U.S. indebtedness, euro crisis, stock market chaos: Is the world going bankrupt?”
French newspapers carried grim headlines on Sunday with Le Journal du Dimanche trumpeting “The world on the edge of collapse” with a sub-headline saying: “The week starting should be crucial. Markets from now on are living in fear of a crash.”
But the newspaper also ran an interview with economic consultant Alain Minc who said th at despite the U.S. downgrade, the United States remained the “ultimate economic harbour”.
Le Parisien newspaper pointed out that the credit rating of the United States was now the same as Spain, Japan and China.
“The world of finance, worried about the Greek crisis spreading to Spain and Italy, risks another plunge tomorrow at the start of trading,” the paper said in its Sunday edition.
G-20, G-7 CRISIS CONTACTS
South Korea said finance deputies from the Group of 20 major economies addressed the European crisis and U.S. sovereign rating downgrade on Sunday morning in Asian time zones.
A Japanese government source said finance leaders from the Group of Seven big developed economies would also discuss the crisis and may issue a statement afterwards, although the timing of such a call was unclear.
French President Nicolas Sarkozy, who chairs the G7/G20 group of leading economies, conferred with Britain’s Prime Minister David Cameron on Saturday.
“They discussed the euro area and the U.S. debt downgrade. Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days,” a spokesman for Cameron said.
In Washington, a White House economic adviser castigated ratings agency Standard and Poor’s for cutting the U.S. credit rating to AA-plus from AAA. The U.S. Treasury said the rating agency’s debt calculations were wrong by some $2 trillion.
Over time, S&P’s move could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.
Shares in Israel’s market, one of the first to trade since the U.S. credit downgrading, fell more than 6 percent by midday on Sunday. Traders were worried about Israeli banks’ exposure to U.S. debt and feared the situation could spin out of control.
Washington’s Asian allies rallied round the battered superpower, with Japan and South Korea both saying their trust in U.S. Treasuries remained unshaken.
“I expressed our country’s position on the (G20 conference) call that there will be no sudden change in our reserve management policy,” South Korean Deputy Finance Minister Choi Jong-ku told Reuters by telephone.
He was referring to Seoul’s heavy ownership of U.S. bonds out of more than $300 billion in foreign reserves.
“There’s no alternative that provides such stability and liquidity,” added Choi, who declined to elaborate further.
There was no confirmation of the timing of a G7 call for finance ministers and central bankers. But a second Japanese government source said it “would be normal” for it to take place before Asian markets opened. Tokyo’s stock market, the biggest in Asia, starts trading at 9 a.m. (0000 GMT) on Monday.
The most immediate concern for financial markets was the debt crunch in the euro zone, where yields on Italian and Spanish debt have leaped to 14-year highs on political wrangling and doubts over the vigour of budget cuts.
Investors saw the ECB’s failure to include Italy and Spain in the relaunch of its bond purchases as a sign of the depth of political divisions over the role of the euro zone currency.
German officials want to see stiffer austerity steps in place before the ECB takes on more Italian and Spanish debt.
The danger is that further pressure on Italian and Spanish bonds could further undermine a damaged European banking system and lock Italy, the world’s No. 8 economy, out of the market.
Indeed, doubts are growing in the German government that Italy could be rescued by the European emergency fund, even if the fund were tripled in size, according to Der Spiegel.
Italy’s financial needs are so huge that it would overwhelm resources, according to government experts, Der Spiegel said in its online edition. Italy’s public debt is about 1.8 trillion euros, or 120 percent of its national output.
Berlusconi has pledged to move up austerity measures and balance the budget to 2013, a year ahead of schedule — steps the ECB will consider to gauge whether to buy its bonds.
Germany has consistently said troubled euro-zone governments should focus on spending cuts and internal reforms, not bailouts. The European Financial Stability Fund currently has 440 billion euros and was designed to help small to medium-sized countries, although the spreading of the debt crisis to Italy and Spain has led to calls for its expansion.
China, the largest foreign holder of U.S. debt, took the world’s economic superpower to task for allowing its fiscal house to get into such disarray.
On Sunday, a commentary