German Chancellor Angela Merkel says it could take Europe years to solve its debt crisis, as growing scepticism about the outcome of last week's EU summit weighed on financial markets.
In a speech to the German Bundestag or lower house of parliament on Wednesday, Merkel defended the move for tighter budget policing in the European Union, saying Europe and the eurozone would emerge stronger from the crisis.
"Getting over the state debt crisis is ... a process. This process won't last weeks, it won't last months, it will last years," she said.
There could be "setbacks but if we don't let ourselves be discouraged ... Europe won't just overcome the crisis but will emerge from it strengthened," she added.
European Union leaders from 26 of the 27 member states agreed at a high-stakes Brussels summit last week to back a Franco-German drive for tighter budget policing in a bid to save the eurozone.
After Britain, which does not use the euro, blocked changes to an EU-wide treaty, the other 26 EU states signalled their willingness to join a "new fiscal compact" imposing tougher budget rules.
Merkel said that with such a fiscal compact: "The vision of a real political union is beginning to take on contours."
Nevertheless, markets remained sceptical whether the moves decided in Brussels will be enough to prevent a break-up of the euro area.
European shares fell and the euro fell below $US1.30 for the first time in nearly a year.
Ratings agency Moody's has said the crisis talks failed to produce "decisive policy measures" and threatened to review the credit ratings of all EU states within the next three months.
Standard & Poor's is expected to decide this week whether or not to downgrade 15 of the 17 eurozone members.
Adding to the negative sentiment were comments by Merkel herself, in which she ruled out an increase in the European Stability Mechanism, the eurozone's future permanent bailout fund.
The lending limit of the EMS, which EU leaders agreed at last week's summit will be up and running a year earlier than planned, should remain at 500 billion euros ($A654.15 billion) , Merkel said on Tuesday.
Her stance underscores a rift among some European leaders over boosting the fund's firepower and how best to tackle the eurozone's fiscal woes.
With experts saying the amount will not be enough to rescue a country such as Italy, analysts at Moneycorp saw the remark as "the latest in a series of psychological blows to confidence in euroland and its sovereign borrowers.
"The German chancellor dropped another brick on the euro's foot," the analysts said in a daily investors' note.
In Australia, deputy central bank chief Ric Battellino warned that markets appeared to be pricing in the possibility of a break-up of the eurozone.
"The formation of the euro area brought convergence of interest rates towards the low levels previously enjoyed only by Germany, but pre-euro relativities are now re-asserting themselves," the Reserve Bank of Australia deputy said.
In two separate bond auctions on Wednesday, Germany saw the yield or rate of return on new two-year treasury notes decline amid strong demand for the issue, while yields on Italian five-year bonds rose to a euro-era record.
Such growing gaps in interest rates "suggests that markets are pricing in the possibility of a break-up of the euro area or a significant risk of default by some governments, or both", Battellino said.
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