French and German leaders proposed a tax on financial transactions and closer joint governance of economic policy to stop the debt crisis in Europe, but did not propose increasing the euro zone bailout fund or selling euro zone bonds, French President Nicolas Sarkozy said on Tuesday.

KEY POINTS: * After talks in Paris, Sarkozy said he and German Chancellor Angela Merkel were also proposing that all 17 euro zone countries commit to balanced finances and write that goal into their constitutional law by summer 2012. * The first of these propositions is to create a real economic government for the euro zone. This economic government will be made up of ... heads of state and government that will meet twice a year, and more if necessary. It will elect a stable president for two and half years, Sarkozy said in a press conference. * The proposals include asking the 17 euro zone countries to put in a deficit limit rule in each government's constitutions by 2012. * Sarkozy and Merkel said they are not proposing common euro zone bond sales at this time. * The two are under pressure to come up with plans to shore up the euro zone and restore financial market confidence after a year and a half of turmoil that has refused to die down despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.

COMMENTS:

PETER BUCHANAN, COMMODITIES ANALYST, SENIOR ECONOMIST, CIBC, TORONTO, ONTARIO, CANADA

The market was obviously fixated on whether they would perhaps improbably agree to support the notion of euro bond issuance, where Germany and France would agree to underwrite and guarantee some of the debt issuance for some of the other members.

Unless you get that, the general conclusion is that the crisis over there is not very much closer to a solution than it was a couple of weeks ago.

FRED DICKSON, CHIEF MARKET STRATEGIST, D.A. DAVIDSON & CO. LAKE OSWEGO, OREGON:

I don't think the markets were expecting a big signal because both Sarkozy and Angela Merkel said they weren't going to consider the consolidation of a euro zone bond... Their joint statement appears to show that there's enough support out there to handle the current situation.

We have France out with no growth yesterday and Germany out with no growth today. It broadens a picture that global economies have experienced a simultaneous pause.

EDWARD MEIR, SENIOR COMMODITY ANALYST, MF GLOBAL, NEW YORK:

I think the main point here is that the euro zone leaders have shown they are paying attention and taking this seriously, that's giving the market a bit of breathing space and in the short-term it's slightly positive.

But it doesn't look like the two biggest items were seriously discussed today -- the potential for a euro bond and the size of the stabilization/bailout fund. At 450 billion euros it could easily be wiped out if one of the larger countries gets into trouble.

PHIL FLYNN, SENIOR MARKET ANALYST, PFG BEST, CHICAGO:

The market was holding out hope that we would be closer to a euro-bond, but it sounds like they're trying to do everything but as it won't be politically acceptable to Germany. They're trying to offset that disappointment with more intervention of some form or another, but the euro is down on that disappointment and the dollar index is up a little bit. I still think the market is trying to get a handle on what this all means, they may be laying the groundwork for euro-bonds, but they may not. What we're moving toward is more uncertainty.

TOM BENTZ, DIRECTOR, BNP PARIBAS COMMODITY FUTURES, INC, NEW YORK, NY:

There was no major news coming out of this, so it looks like a bit of buy rumor, sell fact. The market was hoping for some kind of euro bond deal, but that doesn't look likely, so maybe that pulled the market lower.

FRANK MCGHEE, HEAD PRECIOUS METALS TRADER, INTEGRATED BROKERAGE SERVICES LLC, CHICAGO

At the end of the day, it's going to put worries back into the market about the euro and euro zone that may have been quieting down. It's going to add additional volatility into the gold market.

I think the concept is correct. I think they have a major commitment in seeing the euro hold intact. But at the same time, they have to go through some very significant bailouts prior to being able to worry about accomplishing what they are able to do.

So, they are going to weaken the euro significantly in terms of its exchange rate before they can try to pull it together.

CHRISTIAN COOPER, HEAD OF U.S. DOLLAR DERIVATIVES TRADING, JEFFERIES & CO., NEW YORK

The uncertainty over the euro zone bond issuance at large is what caused the rally the bond market and the sell-off in equities. Merkel said one thing about euro zone bonds. Sarkozy said the opposite immediately afterward. They clearly have to clarifying their comments because it showed they were not on the same page.

DOUGLAS BORTHWICK, MANAGING DIRECTOR, FAROS TRADING, STAMFORD, CONNECTICUT:

Both Chancellor Merkel and President Sarkozy are entirely correct that euro bonds won't help today. This is because Europe still has to pass numerous laws to allow this to happen. We believe today's press conference lays the groundwork for European fiscal union. First the union needs to be created and agreed upon, and then, as President Sarkozy adds, there could be the final step of integration. The ingredients must be gathered before the pie is baked, and this is exactly what France and Germany are lining up with their discussions.

MARC CHANDLER, GLOBAL HEAD OF CURRENCY STRATEGY, BROWN BROTHERS HARRIMAN, NEW YORK:

Overall there are a lot of questions marks coming out of this summit and we have still not seen anything to address the problems in France, the fact that the European Financial Stability Facility still does not have enough resources to buy debt, and how the euro zone can rekindle growth.

This does not seem to be a game-changer or a show-stopper. I am also not sure how much support it will get. This is essentially a Franco-German condominium and they want to impose their will on everyone else. Market participants went into this summit with low expectations and they certainly met those low expectations.

MOHAMED EL-ERIAN, CO-CHIEF INVESTMENT OFFICER, PACIFIC INVESTMENT MANAGEMENT CO., NEWPORT BEACH, CALIFORNIA:

A strong message from Germany and France that the euro zone's policy focus should be on further economic integration and broad-based fiscal discipline and not on additional financing for peripheral economies.

Rather than the additional check writing by core European governments that certain markets were looking for, including a new euro bond, they are getting a fiscal discipline golden rule, stronger economic governance, and a new financial transactions tax.

ANDREW WILKINSON, SENIOR MARKET ANALYST, INTERACTIVE BROKERS, GREENWICH, CONNECTICUT:

Investors were looking for some big-picture solution to the euro zone debt crisis. Looking at these headlines, I don't think much has been achieved. There's a desire among investors for some kind of harmonization of government bond issuance, and I don't see that yet. It seems to be more the case that the dollar is on the back foot, so the timing of the announcement couldn't have been better for the euro since it was already rising.

FABIAN ELIASSON, HEAD OF U.S. CURRENCY SALES, MIZUHO CORPORATE BANK, NEW YORK

The euro is reacting pretty positively. The market was expecting maybe a little more, but it's pretty solid first step.

RICHARD FRANULOVICH, SENIOR CURRENCY STRATEGIST, WESTPAC, NEW YORK:

Sarkozy talks about common governance for the euro zone, which I think is one step closer toward a fiscal union. That's positive for the euro overall. However, there was a headline on taxing financial transactions which is not good for euro zone banks. On balance though, fiscal consolidation is more important and that has shored up the euro.

MARKET REACTION: STOCKS: U.S. stocks rallied BONDS: U.S. bond prices pared gains FOREX: The dollar turned negative against the euro