European capitals were rife with rumour about an imminent Greek default on its debt and French banks, which hold a major share of that debt suffered as a result, losing as much as 12 per cent, although markets rallied somewhat at the close of trading on Tuesday.

In a bid to calm nervous investors, it was announced that French President Nicolas Sarkozy and German Chancellor Angela Merkel will hold a conference call with Greek Premier George Papandreou on Wednesday to decide on immediate action.

Rumours about a Greek default began to affect markets adversely on Tuesday after it became clear that the country had failed to meet the fiscal goals set out in its EU/IMF bailout.

By French banks moved toward the centre of the European debt storm as growing concerns among investors about their ability to handle a potential Greek default raised the possibility the French government might need to take steps to strengthen the banks' financial positions.

Shares in BNP Paribas and Societe Generale, both globally interconnected French banks considered ‘too big to fail' by the government in Paris, slid as much as 12 per cent, continuing a month-long decline that prompted several government officials to close ranks on Monday in a bid to stop the attacks in the market. However, markets rallied towards the end of the day, with European stocks rising for the first time in three days. The benchmark Stoxx Europe 600 Index rebounded from a two-year low, as banking shares and carmakers advanced.

A gauge of European lenders climbed 2.9 per cent as Societe Generale and Deutsche Bank jumped more than 7 per cent. Bayerische Motoren Werke and Daimler led gains in European carmakers, both increasing more than 2 per cent. Cairn Energy fell 9.5 per cent, for the largest drop on the Stoxx 600, after abandoning its second oil well in less than two months.

However, worries persist. The French bank governor Christian Noyer said his country's banks “Have the means to face up to it, whatever the Greek scenario.” The Governor also ruled out any plan to nationalise French banks — at least for the moment. French Industry Minister Eric Besson described as “totally premature” even a partial nationalization of French banks, BNP Paribas announced it was getting rid of euro 4 billion of assets and a reduction in force exercise is also planned with over a thousand jobs likely to be axed. Societe Generale, BNP Paribas and Credit Agricole are considered integral actors in the French economy, lending billions of euros to businesses and individuals, and the government has said it will never let them any of them fail. Off the record finance ministry officials have told French journalists that the government is prepared to step in should any of the banks be threatened either by a hostile takeover bid or by the question of recapitalisation.

More In: Business | Markets