The German and French leaders met on Monday to discuss how to boost growth in euro zone states struggling to tackle the sovereign debt crisis and rising unemployment, and to finalize a deal on closer budgetary ties within the currency union.

They may also broach a financial transaction levy, the Tobin tax, being promoted by France but resisted by Britain unless adopted on a global scale, which could split the European Union at a summit at the end of the month.

Chancellor Angela Merkel and President Nicolas Sarkozy, aiming to align the two powerhouse partners that have driven European integration, were also expected to consider options for boosting employment against an unfavorable backdrop of harsh austerity and mounting funding tensions in the banking sector.

They were scheduled to hold a joint news conference at 1.30 p.m. local time (7:30 a.m. EST).

Germany's economy keeps showing it can withstand the crisis, with a rise in exports reported on Monday and the labor market thriving.

But employment is a pressing issue for Sarkozy, who faces an election in less than four months trailing in polls with French jobless claims at their highest level in 12 years and the country on course for a record trade deficit in 2011.

Prime Minister Francois Fillon said on Monday France's fiscal gap would probably be narrower than forecast this year but he did not rule out new deficit-cutting measures.

Sarkozy may try to push plans for a tax on financial transactions, which he has set out as a priority ahead of the election, and which on Friday he vowed to implement in France even if EU partners like Germany are not on board.

Paris and Berlin want a Tobin tax to be applied across the EU, but Britain is resisting, fearing it will damage London, a global financial centre and mainstay of the British economy where much of the tax would be raised.

On Sunday, British Prime Minister David Cameron said he would veto a European-wide financial transaction tax unless it was imposed globally, deepening the confrontation over the matter with both France and Germany.

French daily Le Monde said on Monday Sarkozy's government might limit its ambitions for the tax to a levy on share purchases, and leave taxes on derivatives and/or bonds until a later stage.

There was no immediate comment from the finance or budget ministers' offices.

DEBT CRISIS WEIGHS

German officials expect the EU summit to show satisfying results on stronger budgetary rules they have urged for countries using the euro.

The updated version of the EU's 'fiscal compact', which gives Brussels the right to take states to court if they violate the stricter rules, is nearing approval, relieving pressure on Merkel to take new initiatives at the summit.

Reaching a functional agreement already by the next (EU) meeting on Thursday is not out of the question, Elmar Brok, a German member of the European parliament, told Reuters.

The euro crawled back from a fresh 16-month low against the dollar on Monday, with markets awaiting the outcome of the meeting in Berlin, but further declines were anticipated as worries about euro zone debt persisted.

Hanging over the meeting was Europe's sovereign debt crisis, and questions over what can be done in the near term to relieve pressure on states like Spain and Italy, which are due to pay back a mountain of maturing debt this year.

Market unease was reflected on Monday in the first ever negative auction yield on six-month German government debt, with investors paying 0.0122 percent for the privilege of parking funds with Berlin until July.

Both states face crucial bond auctions this week that will test investors' willingness to fund countries at a time when low growth, weak public finances and the threat of ratings downgrades risk driving borrowing costs to unsustainable levels.

Until now Germany has favored a crisis-fighting proposal to boost funding for the International Monetary Fund so that it could open larger credit lines to troubled euro zone states if needed, in exchange for strict adjustments.

In a further sign that diplomatic efforts to tackle the euro crisis are once again intensifying, an aide to Merkel said the chancellor will meet IMF Managing Director Christine Lagarde on Tuesday, for what was called an informal exchange of views.

Italy, which requested IMF monitoring in November to calm market concerns over its reform measures, would prefer to avoid reliance on a plan centered on IMF aid, which Italy's former economy minister has called the most serious risk for Italy.

Concern over Italy may have led the French and German leaders to strengthen ties with Prime Minister Mario Monti. He met Sarkozy in Paris last week, and will visit Merkel for talks on Wednesday.

The three meet again in Italy on January 20, before a January 23 EU finance ministers meeting and the January 30 EU summit.

(Writing by Brian Rohan and Stephen Brown; Editing by John Stonestreet)

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