Political and financial leaders gave their first sign of readiness to battle a debt crisis gone global when the European Central Bank signaled on Sunday it would start buying Italian and Spanish debt, a critical move to quell a bond rout that has rocked financial markets.

The European Central Bank decision would be aimed at calming markets grown increasingly doubtful about Europe's ability to deal with its debt issues, a strikingly parallel concern to that which led ratings agency Standard & Poor's to knock U.S. debt down from risk free AAA status to AA-plus.

Meanwhile, finance chiefs from Group of Seven industrial nations were to confer by telephone late on Sunday-- and possibly issue a statement afterward -- to try to soothe anxious investors after a week in which $2.5 trillion of market value was wiped out.

Any statement would be timed to precede the opening of trading in Tokyo, the first major market to open on Monday, at 9 a.m. local time (0000 GMT/8:00 p.m. EDT Sunday).

ECB President Jean-Claude Trichet said in a statement after discussions with his Governing Council on Sunday that the central bank welcomes new steps taken by Italy and Spain on fiscal and structural reforms, and hence it would actively implement its bond-buying program. A monetary source said this means it is ready to start buying up the debt of these two countries.

The Euro system will intervene very significantly on markets and respond in a significant and cohesive way, the source said.

Political leaders are under searing 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 wanted 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.

LOOKING FOR A BOUNCE

Buying Italian bonds would likely prompt a sizable relief rally on global markets.

On Sunday afternoon, German Chancellor Angela Merkel and French President Nichola Sarkozy weighed in with a joint statement praising both Italy and Spain for their pledges to impose budget austerity.

They stressed that complete and speedy implementation of the announced measures is key to restor(ing) market confidence.

The back-and-forth between Standard & Poor's and the Obama administration over whether the downgrade of Washington's rating was justified continued on U.S. Sunday-morning talk shows where a senior official from the ratings agency said its concerns about political impasse in Washington were valid.

John Chambers, an S&P managing director, said on ABC's This Week that years may be needed to regain AAA status and even them it would take, I think, more ability to reach consensus in Washington than what we're observing now.

White House economic adviser Gene Sperling blasted the S&P ruling on Saturday night, saying it smacked of an institution starting with a conclusion and shaping any arguments to fit it.

U.S. Treasury Secretary Timothy Geithner, who had indicated he might leave the administration once an increase in the debt ceiling was agreed, announced on Sunday that he was not doing so and would stay on.

That relieves President Barack Obama of the difficult prospect of finding a replacement who could win Senate confirmation in Washington's bitterly partisan atmosphere.

Treasury says that S&P's debt calculations were off by $2 trillion but the agency said that did not change the fact that the United States' longer-term debt prospects were worsening.

Twin debt crises in the United States and Europe had policy makers scrambling to keep financial markets from panic.

The ECB reactivated its sovereign bond-buying program on Thursday but purchased only small quantities of Irish and Portuguese bonds, seeking tougher austerity measures from Italy. That did nothing to stem market attacks on Italian assets.

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 labor market reforms after talks with trade unions and employers.

He gave little detail about how that would be achieved and the measures will take some time to enact.

G-20, G-7 CRISIS CONTACTS

South Korea said finance deputies from the Group of 20 big economies addressed the European crisis and U.S. sovereign rating downgrade in an emergency conference call on Sunday morning Asian time.

French President Nicolas Sarkozy, who chairs the G7 and G20 forums this year, conferred with Britain's Prime Minister David Cameron on Saturday.

Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days, a spokesman for Cameron said.

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.

S&P chief David Beers told Fox News Sunday that the Treasury Department's criticism of the credit rating agency's analysis was a complete misrepresentation. Even with the debt limit agreement passed by the U.S. Congress, he said, the underlying debt burden of the U.S. is rising and will continue to rise over the next decade.

Asked about prospects for a further lowering of the U.S. rating, Beers said the agency's negative outlook meant that risks are on the downside.

ALARM IN GERMAN, FRENCH MEDIA

Newspapers in Germany, the euro zone's reluctant bankroller, 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 and wrote: No one could have foreseen this dramatic crash and now the situation can only be endured with gallows humor.

French newspapers carried grim headlines 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.

Washington's Asian allies rallied round the battered superpower, with Japan and South Korea both saying their trust in U.S. Treasuries remained unshaken and urging investors not to panic.

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, referring to Seoul's heavy ownership of U.S. bonds.

There's no alternative that provides such stability and liquidity, added Choi.

SPLITS IN ECB

In some quarters including in the German government, there are doubts that Italy can be rescued by the European emergency fund, even if the fund were tripled in size, according to newsmagazine 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.

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 ($632.5 billion) and would need to be expanded to cater for the likes of Italy and Spain.

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 in the People's Daily, the main newspaper of the ruling Communist Party, said Asian exporters, who depend on demand from the United States, could be among the biggest victims of the mounting U.S. economic woes.

The lowering of the United States' long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the U.S. dollar, said economist Sun Lijian, writing in the paper.

(Additional reporting by Laura McInnis in Washington, Sarah Marsh in Berlin, Astrid Wendlandt in Paris, Kim Yeonhee and Yoo Choonsik in Seoul, Praveen Menon and Shaheen Pasha in Dubai, and Reuters bureaux worldwide; Writing by Mark Heinrich and Glenn Somerville; Editing by Eric Walsh)