By Keith Weir and Gernot Heller
BERLIN/LONDON (Reuters) - Germany struggled on Sunday 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 ($48.5 billion) 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 U.S. 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.
But he said he had never gone as far as to propose a pan-European rescue fund for banks -- something Berlin had balked at when talk of it surfaced a few days ago.
"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.
GERMAN EFFORTS
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.
"We are fighting for the future existence of the company," HRE spokesman Hans Obermeier said.
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. "That is certainly very surprising," he added.
The credit crisis is one of the factors pushing many industrialized countries toward recession.
"The world economic situation is very worrying," International Monetary Fund (IMF) managing director Dominique Strauss-Kahn said on Saturday, adding the IMF would be cutting its world economic growth forecasts.
France said on Sunday 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.
"France has never hidden that a rate cut, even small, could be a sign, a sign that could give confidence, a sign that invites to invest again, to take a wager on the future," senior presidential adviser Claude Gueant told Europe 1 radio.
"If such a decision were taken, France would be satisfied," he added.
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.
Britain's new business minister Peter Mandelson criticized unilateral moves by individual countries to guarantee bank deposits, the Sunday Telegraph reported.
Mandelson, EU trade commissioner until his appointment to Brown's cabinet on Friday, told the paper in an interview that moves by governments such as Ireland and Greece to guarantee local bank deposits could lead to market distortions.
"The danger of this crisis is it may spark a new wave of economic nationalism, with each country looking for a 'get out of jail free' card. People have to realize that selective or national approaches could lead markets to look to parts of the financial system in a distorted way," he said.
Ireland has promised to guarantee all bank deposits, a move that prompted some depositors in Britain to move savings to branches of Irish banks. In other countries, the protection level can be as low as 20,000 euros ($27,720).
(Additional reporting from Paris, Frankfurt, Brussels and Luxembourg; editing by Myra MacDonald)
