Germany struggled yesterday to rescue lender Hypo Real Estate, underlining the challenge facing European leaders who vowed to restore stability to a banking system hit by the worst crisis since the 1930s. Officials from the government, central bank and financial regulator were meeting to discuss the plight of HRE after German banks and insurers pulled out of a state-led 35 billion euro rescue programme agreed only days ago.

Belgium and Luxembourg were also scrambling to protect depositors and tens of thousands of jobs by finding a buyer for what remained of bank and insurance group Fortis after the Dutch nationalized the rest. The financial system in Europe has been badly hit by the fall-out from a crisis which began in the United States when the housing market collapsed and bad mortgage debts multiplied.

The escalating crisis has paralyzed wholesale money markets, caused huge volatility on stock markets and changed the banking landscape in a matter of weeks. Leaders of the biggest European countries met in Paris on Saturday to coordinate a response after the US authorities approved a $700 billion bank bailout to buy up toxic assets.

French President Nicolas Sarkozy, who called the emergency meeting, said governments needed to act in a coordinated manner. ?We jointly commit to ensure the soundness and stability of our banking and financial system and will take all the necessary measures to achieve this objective,? the leaders of France, Germany, Britain and Italy said in a statement. They urged the European Commission to produce legislative proposals in the near future on bank deposit insurance in the European Union and urged immediate establishment of cross-border agencies to improve supervision. The woes of Munich-based HRE, which lends money for property projects and to governments, was a headache for German Chancellor Angela Merkel who attended the Paris summit where she said that those responsible for the crisis must contribute to resolving it.

Neither HRE nor the banks and insurers involved had informed the government before the collapse of the rescue package, German finance ministry spokesman Torsten Albig said. The credit crisis is one of the factors pushing many industrialized countries toward recession. France said yesterday it remained in favor of an interest rate cut by the European Central Bank to give a shot in the arm to the continental economy.

Divisions are evident between European Union countries over how to tackle the financial crisis. Sarkozy?s summit involved Merkel, British Prime Minister Gordon Brown and Prime Minister Silvio Berlusconi of Italy. Smaller EU nation Finland condemned the meeting, saying all EU nations should be consulted.