Italian Economy Minister Giulio Tremonti stepped up calls for a more coordinated response to the euro zone debt crisis, including the creation of euro bonds, ahead of a crucial Franco-German summit next week.

Tremonti returned to proposals for jointly-issued bonds that would effectively make individual governments' debt a common burden, saying they were the master solution to the euro zone debt crisis.

We would not have arrived where we are if we had had the euro bond, he said on Saturday.

However the idea was immediately rejected by German Finance Minister Wolfgang Schaeuble, who said such bonds would undermine the basis for the single currency by weakening fiscal discipline among member states.

I rule out euro bonds for as long as member states conduct their own financial policies, and we need differing interest rates so that there are possibilities of incentives and sanctions to force fiscal solidity, he told Der Spiegel weekly.

Without that kind of solidity, there is no foundation for a joint currency, he added, according to extracts of an interview released ahead of publication.

The comments underline the sharp divisions hampering efforts to coordinate a response to the euro zone debt crisis, which escalated dramatically last month as markets turned their fire on Italy, one of the bloc's most heavily indebted countries.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Paris on Tuesday, with what Tremonti called strong expectations hanging over the encounter.

Underlining the concerns about the spreading euro zone debt crisis which have grown outside the currency bloc, Britain's Finance Minister George Osborne said some kind of fiscal union may now be needed for the 17-member euro area.

Asked if the only answer for the euro zone was some form of fiscal union, he told BBC radio: The short answer is yes.

What is at stake was highlighted by a new poll for the Bild am Sonntag newspaper on Saturday which showed 31 percent of Germans believe the euro will be gone by 2021.

EURO ZONE

A lot depends on the choices which may be made about Europe and for Europe in the coming days, Tremonti told a news conference. He detailed some of the steps contained in a 45.5 billion-euro austerity package unveiled by Italy late on Friday.

The package, a painful mix of spending cuts and tax increases, was passed largely at the insistence of the ECB, which demanded action in return for agreeing to protect Italian bonds by buying them on the market.

Italy has the second highest public debt burden in the euro zone at 120 percent of gross domestic product but had until recently stayed out of the crisis thanks to a relatively modest budget deficit and a generally conservative financial system.

However doubts about its chronically slack growth and its divided center-right government led to a sharp turnaround in market sentiment last month.

Although markets have not had time to react to the latest austerity package, the surge in bond yields which had driven Italy's borrowing costs to unsustainable levels has eased since the ECB began buying Italian bonds on Monday.

As the crisis has spread from smaller countries like Greece and Ireland to big economies like Italy, the prospect of an emergency that would overwhelm all existing bailout tools has brought more radical solutions, including euro bonds, more sharply into focus.

Greece, which last year became the first euro zone country to seek a bailout and which has been a strong supporter of the euro bond idea, reiterated its position on Saturday.

Risks could have been avoided if there had been political decisions to strengthen the temporary rescue mechanism, and even more if we had moved toward a euro bond, government spokesman Ilias Mosialos told Sunday newspaper To Proto Thema.

(Additional reporting by Avril Ormsby in London, Harry Papachristou in Athens and Erik Kirschbaum in Berlin; editing by Andrew Roche)

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