World Bank chief: Governments should deal with global debt

World Bank President Robert Zoellick also said it was time to push a free trade agenda, warning against rising protectionism as nations seek to solve their debt crisis.

"This is really at a stage where you still have sovereign governments having to make decisions in Europe," Zoellick told reporters in the Australian capital Canberra on Tuesday.

"It really is going to be the responsibility of each of those sovereign entities to make the calls on how they are going to face not only the short-term challenges, often assisted by their central banks, but also go to the medium and long term," he said.

Euro zone policymakers have been battling to contain a debt crisis that threatens to enter a dangerous new phase by engulfing larger nations on the region's periphery, with the European Central Bank stepping in last week to buy Italian and Spanish bonds in a bid to calm nervous markets.

But the idea of so-called "Eurobonds" or joint euro zone bonds has been fiercely opposed by Berlin, which is fearful such a step would push up German borrowing costs and reduce incentives for weaker euro zone members like Greece to reform their economies.

Zoellick said the loss of market confidence in economic leadership in key countries like the United States and Europe coupled with a fragile economic recovery had pushed markets into a new danger zone.

"What markets are looking to is a long-term action plan that goes beyond discretionary spending," he said of the United States.

"So far, we've been able to kind of hold off the dogs of protectionism, but as you get slowdown, these risks can build."

European banks were rocked last week by concern about a squeeze for short-term funding, with tougher and more costly financing and a retreat by U.S. money market funds prompting lenders to turn to the ECB for more cash. France's banks were hit particularly hard.

Zoellick said the appreciation of China's yuan currency would be a positive in helping restore global economic stability and tackling China's inflation

"That could help deal with some of the inflation rate and is also a contributor, I think, to some of the stability in the international system," Zoellick said

(Reporting by Rob Taylor; Editing by Ed Davies and Balazs Koranyi)