Leading policymakers were unusually candid on Friday in voicing fears that the euro zone's financial and banking woes could derail the global economic recovery.

The troubles of Greece and other heavily indebted European governments dominated conversations ahead of a meeting of finance ministers and central bankers of the Group of 20 of the world's top developed and emerging economies, Canadian Finance Minister Jim Flaherty said.

It is essential to ensure continued recovery that Europe fix its banks. It is essential that certain vulnerable European nations follow through with major fiscal consolidation, and get the job done, Flaherty told reporters in Busan, South Korea.

Gatherings such as the G20 are typically an opportunity for officials to radiate confidence, especially when financial markets are in a nervous state, as they are now.

But Flaherty was not alone in his warnings.

We can't afford to be complacent, South Korean Finance Minister Yoon Jeung-hyun told the opening session.

Without further and ongoing action from us, the recovery may not remain on track and we may not be able to achieve strong, sustainable and balanced growth, he said.

South African Planning Minister Trevor Manuel said he could not think of a more challenging time than the present for the Group of 20. Decisions needed taking, he said, to banish the specter of a double-dip recession.

It's important that we all understand just how fragile the recovery is, Manuel, himself a former finance minister, said.

As ministers got down to work, police boats patrolled near the beach hotel where they are meeting. Authorities have stepped up security in the southern port city in the face of war-like rhetoric on the divided peninsula after the South accused North Korea of sinking one of its warships.

ALL EYES ON EURO ZONE

The 16-nation euro zone is bailing Greece to the tune of 110 billion euros after Athens lost the confidence of bond markets and was unable to roll over its vast debts.

The euro zone, working with the International Monetary Fund, is also putting together a 750 billion euro ($910 billion) safety net for other member countries with big debts in case they too fail to find buyers for their bonds. A forced debt restructuring would inflict heavy losses on euro zone banks.

Investors first responded enthusiastically to the May rescue package, but the euro has since slumped on doubts about the capacity of southern European states to plug holes in their budgets.

World stock markets have shuddered at the prospect that Europe's woes could derail a recovery from the deepest financial crisis since the 1930s.

Just when we thought we had turned the corner there are clouds on the horizon, World Bank Managing Director Ngozi Okonjo-Iweala told Reuters.

But U.S. Treasury Secretary Timothy Geithner sounded a more optimistic note.

The world economy came into this period of concern about Europe with stronger underlying momentum and growth than many people expected, and we're in a much stronger position to get through this, Geithner told CNBC television en route to Busan.

BANKING STALEMATE

Turning to the other main item on the Busan agenda, Geithner said the G20 shared a commitment on the need for common standards across global financial markets that will constrain some of the risk-taking that helped fuel the 2007/08 financial meltdown.

Rich-country taxpayers had to fork out trillions of dollars to rescue banks felled by the crisis, but fierce opposition from Canada, among others, has torpedoed the idea of a global bank levy to pay for any future bailout.

Instead, finance ministers will work on a menu of options for their political leaders to endorse at a summit in Toronto at the end of the month with a view to making more specific commitments at a follow-up summit in Seoul in November.

Different countries' banking sectors are in different situations. So there won't be a one-size-fits-all policy, Sakong Il, chairman of the presidential committee for the G20, told reporters.

G20 leaders agreed last September that banks must hold far more capital and liquidity by the end of 2012 so they are less likely to need more taxpayer handouts in the next crisis.

Banks are lobbying hard to have the new rules phased in over a longer period and tough new capital rules on bank trading books due in January already appear set to be delayed.

($1=.8223 Euro)

(Additional reporting by James Pomfret, Sophie Taylor and Yoo Choonsik; Writing by Alan Wheatley; Editing by Tomasz Janowski)

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