The leaders of Germany and Britain sent out conflicting signals on Friday about how to solve the euro zone's debt crisis and admitted they had failed to narrow differences over the introduction of a financial transaction tax in Europe.

At a news conference in Berlin, British Prime Minister David Cameron and German Chancellor Angela Merkel tried to paper over divergent views on European policy that have sparked a war of words between politicians and media in both countries.

But they could not mask differences over how the single currency bloc's debt crisis should be handled, with Cameron calling for decisive action to stabilize the euro zone and Merkel making clear she favored a step-by-step approach.

My German isn't that good, I think a bazooka is a Superwaffe, am I right? Cameron said in response to a question about his call for euro zone policymakers to use a big bazooka approach to the crisis.

The chancellor and I would agree that whatever you call this we need to take decisive action to help stabilize the euro zone, he said, citing the need for strong action on Greece, a rescue fund with power and punch and a recapitalization of European banks.

Merkel struck a more cautious note.

She is under increasing pressure to support bolder crisis-fighting steps from the European Central Bank (ECB), such as using it as a lender of last resort for the bloc or backstop for the euro zone's bailout fund, the European Financial Stability Facility (EFSF).

So far she has resisted, backing the argument of the German Bundesbank that this would violate the ECB's inflation-focused policy mandate. Infringing on this awakes traumatic memories in Germany of the hyperinflation that followed the two world wars.

The British demand that we use a large amount of firepower to win back credibility for the euro zone is right. But we have to take care that we don't pretend to have powers we don't have. Because the markets will figure out very quickly that this won't work, said the center-right chancellor.

Merkel is focusing on changes to the EU's Lisbon Treaty to force other euro members to adopt German budget discipline. She believes this would convince financial markets that Europe is serious about getting its debt and deficits under control.

One German source said the two leaders discussed a possible formulation for a deal on treaty change, where Cameron would go along with Berlin's wishes in exchange for more opt-outs from Europe to keep eurosceptics in his Conservative Party happy.

British officials were not immediately available to confirm the discussion.

SPEAKING GERMAN

Asked about Germany's push for the introduction of a financial transaction tax in Europe, Merkel admitted that she and Cameron did not make any progress.

Britain is concerned that introducing the so-called Tobin tax in Europe alone would undermine the competitiveness of its financial industry in the City of London, which Cameron said would drive away business to countries without such a tax.

Naturally there are differences. But Europe can only prevail if all the strong countries of the European continent are represented and if we have a bit of tolerance for the different views, Merkel said.

The two leaders tried their best to present a united front, calling each other by their first names, saying a few words in each other's language and stressing their common interest in a strong euro and a competitive European single market.

But aides say Merkel is running out of patience with what she sees as Cameron's constant sniping at the euro zone, which so exasperates her close ally Nicolas Sarkozy of France that he recently told Cameron at a summit he was sick of it.

At a meeting of Merkel's Christian Democrats (CDU) earlier this week, her party's parliamentary leader accused Britain of only defending its own interests and announced triumphantly that Europe is speaking German all of a sudden, a reference to widespread acceptance of German fiscal rigour in the bloc.

Her widely-respected finance minister, Wolfgang Schaeuble, was quoted as saying it was inevitable that the whole of Europe would eventually join the single currency and this may happen more quickly than some people in the British Isles believe.

Such comments have sparked a strong reaction in the British press, with the eurosceptic and conservative Daily Mail saying: We no longer need to fear the jackboot but we have a great deal to fear from German bossy boots.

Germany's top-selling Bild newspaper retaliated, asking on the morning of Cameron's visit: What is England still doing in the EU?

(Additional reporting by Andreas Rinke; Writing by Noah Barkin and Stephen Brown; Editing by Jon Hemming)

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