The eurozone's runaway debt crisis is dragging down growth, the EU warned on Thursday as finance ministers headed to key talks and central banks rode to rescue of the cash-starved lenders.
The European Central Bank, along with its US, Japanese, Swiss and British counterparts, announced they would inject extra dollar liquidity into banks facing a shortage of the US currency.
European bank shares have plunged over the past weeks as their usual sources of dollars have dried up on concerns they might be hit by a Greek debt default, and the announcement sparked a strong bank and general stocks rally.
The ECB said the central banks will "conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year."
Their action followed a gloomy economic report from the European Commission.
EU Economic Affairs Commissioner Olli Rehn said the economy was set to come to a "virtual standstill" in the second half of the year, but he assured that Europe would avoid another recession.
"The outlook for the European economy has deteriorated," Rehn told a news conference releasing the interim economic report. "We are expecting a stalling of economic growth but not a recession."
Although the growth forecast for 2011 remained at 1.6 percent, it will slow to 0.2 percent in the third quarter and a mere 0.1 percent in the final three months of the year, worse than previously thought.
EU finance ministers meet in Wroclaw, Poland, for dinner on Thursday ahead of two days of talks centered on a new Greek rescue package that was agreed by eurozone leaders in July but has yet to be implemented.
Highlighting deep concerns over the crisis' global impact, US Treasury Secretary Timothy Geithner will join his EU counterparts in Poland on Friday to deliver a rare address by an outsider.
Table showing annual EU growth and inflation for 2010 and 2011
In Washington, IMF chief Christine Lagarde warned that political dysfunction and indecision was fueling a "vicious cycle" that threatened to send Europe and the United States back to recession, threatening developing countries as well.
"If the advanced economies succumb to recession, the emerging markets will not escape. Nobody will. Rebalancing is in the global interest, but it is also in the national interest," she said.
With markets convinced that Athens was headed towards default, French President Nicolas Sarkozy and German Chancellor Angela Merkel insisted Wednesday that Greece belonged in the eurozone.
In a three-way call with the French and German leaders, Greek Prime Minister George Papandreou promised to apply overdue measures required of Greece in return for the next slice of rescue money.
Rehn said he expected auditors from the EU, IMF and European Central Bank to complete their review of Greece's budget measures by the end of September, which could pave the way for Athens to receive the next installment of a 110-billion-euro ($151 billion)bailout it was granted last year.
Without the eight billion euros in funding Athens will run out of cash next month.
A new 159-billion-euro lifeline also hangs in the balance and will be at the centre of talks in Poland.
Sarkozy and Merkel stressed in a statement that "now more than ever it is indispensable" to implement the measures agreed at the July 21 eurozone summit aimed at stabilising the eurozone.
Finance ministers will also consider a compromise deal reached with the European Parliament aimed at toughening the EU's deficit and debt rules, long ignored by governments.
But divisions remained between EU states over the idea of issuing unified eurozone bonds.
The European Commission said it would soon present options for such "eurobonds," but with German Chancellor Angela Merkel repeated her opposition on Thursday, calling them an "absurdity."
Market analysts argue that eurobonds could be a quick way to resolve the debt crisis because they would level out interest rates across the single currency area, and eliminate the possibility of markets boycotting the debt of single countries seen at risk.
Germany enjoys the lowest interest rates thanks to its healthy budget and economy. And its growth prospects, according to the commission's report, improved to 2.9 percent for 2011.
The forecast, however, worsened in Italy (from 1.0 percent in a previous forecast to 0.7 percent), France (from 1.8 percent to 1.6 percent) and the Netherlands (from 1.9 percent to 1.7 percent), the report showed.
"Recoveries from financial crises are often slow and bumpy. Moreover, the EU economy is affected by a more difficult external environment, while domestic demand remains subdued," Rehn said.
"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."
The European Commission said that weakening global demand and trade over the summer, and signs that the recovery lost steam in the United States over the summer, also contributed to Europe's economic slowdown.