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Republican House Speaker John Boehner has walked away from crunch debt ceiling talks at the White House with US President Barack Obama.

Mr Obama said Mr Boehner had rejected an “extraordinarily fair deal” that would have included $ 650bn (£400bn) of cuts to entitlement programmes.

Mr Obama said he had been willing to take “a lot of heat” from his party.

Mr Boehner said in a letter circulated to the Republican rank and file: “In the end, we couldn’t connect.”

“I have decided to end discussions with the White House and begin conversations with the leaders of the Senate in an effort to find a path forward,” the letter said.

The talks have been aimed at avoiding what analysts say would be a catastrophic US debt default on 2 August.

“It is hard to understand why Speaker Boehner would walk away from this kind of deal,” the president said at a news conference on Friday evening.

“There are a lot of Republicans who are puzzled as to why it couldn’t get done,” he added.

Meanwhile, senior Republican aides have said President Obama and congressional Republicans had been close to reaching a deal to raise the debt ceiling early last week, but said the White House had changed its demand to call for higher taxes.

Angela Merkel wants private investors to share taxpayers’ burden if Greece restructures its debts

German Chancellor Angela Merkel and French President Nicolas Sarkozy have hammered out a common position on the euro debt crisis.

A statement by the French president’s office said agreement had been reached after seven hours of talks in Berlin.

It comes ahead of a crunch meeting of eurozone leaders to resolve the Greek debt crisis and prevent further contagion to other eurozone economies.

Details of the deal have not yet been released.

Jean-Claude Trichet, the European Central Bank president, was also brought into the discussions, according to a spokesman for Mrs Merkel.

Germany had previously insisted that Greece’s lenders should be forced to take losses as part of any further rescue deal for Athens.

But this had been opposed by France and the ECB, who fear it could spark a Europe-wide banking crisis, push Spain and possibly Italy into trouble, and even jeopardise the solvency of the ECB itself.

‘Very serious’

Policymakers are set to discuss a range of measures at the meeting later on Thursday, including a new loan package to Greece and the role of private investors in any debt restructuring.

Reports suggest a new tax on banks will also be debated.

But German Chancellor Angela Merkel has cautioned against over optimism.

Greece received its first aid package in May last year, but the debt crisis continues to undermine confidence in global financial markets, with some commentators suggesting it threatens the future of the euro itself.

Politicians and investors are calling for decisive action to help bring the crisis to an end.

“Nobody should be under any illusion; the situation is very serious,” European Commission President Jose Manuel Barroso said on Wednesday.

“It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.”

The Governor of the Bank of England, Sir Mervyn King, has said that the crisis in the eurozone posed the most serious and immediate risk to the UK’s financial system.

President Barack Obama has also weighed in, calling Mrs Merkel on Tuesday night to stress the importance of tackling the debt crisis in sustaining the global economic recovery.

The International Monetary Fund has also called on European leaders to take swift and decisive action.

Delaying such action further would be “very costly” for the world economy, it said.

Spending cuts

However, there are divisions among policymakers about the best way to resolve the crisis.

There appears to be consensus on the need for a new loan agreement, analysts say, thought to be similar in size to the 110bn euro ($ 156bn; £97bn) package agreed last year.

However, there is also a growing consensus that this will merely act a sticking plaster, and that the fundamental problem of Greece’s indebtedness needs to be addressed.

Athens has already implemented a raft of wide ranging austerity measures, including spending cuts and tax rises, and earlier this month agreed to further drastic action to cut its debt.

Bank tax

But there is a growing sense that these will not be enough. The only way to resolve the problem is to restructure Greece’s debts, many observers argue.

Germany has proposed allowing Athens more time to repay, effectively rolling over existing debts into new bonds.

It wants private investors, largely banks, to participate in this restructuring.

But the European Central Bank has strongly opposed this plan, arguing that such a rollover would constitute a default in the eyes of the international credit ratings agencies and, as such, would undermine investor confidence and the euro itself.

An alternative way get private investors to contribute to any aid package would be to introduce a new bank tax.

Reports suggest leaders will discuss precisely such a tax, even though this would prove hugely unpopular with the banks.

It is these divisions that explain Mrs Merkel’s attempts to dampen expectations ahead of the summit.

The summit will take place in Brussels at 1300 local time (1100 GMT).

Angela Merkel wants private investors to share taxpayers’ burden if Greece restructures its debts

Eurozone leaders will meet on Thursday for a crunch summit to try to resolve the Greek debt crisis and prevent any further contagion to other so-called peripheral economies.

Policymakers will discuss a range of measures, including a new loan package to Greece and the role of private investors in any debt restructuring.

Reports suggest a new tax on banks will also be debated.

But German Chancellor Angela Merkel has cautioned against over optimism.

‘Very serious’

Greece received its first aid package in May last year, but the debt crisis continues to undermine confidence in global financial markets, with some commentators suggesting it threatens the future of the euro itself.

Politicians and investors are calling for decisive action to help bring the crisis to an end.

“Nobody should be under any illusion; the situation is very serious,” European Commission President Jose Manuel Barroso said on Wednesday.

“It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.”

The Governor of the Bank of England, Sir Mervyn King, has said that the crisis in the eurozone posed the most serious and immediate risk to the UK’s financial system.

President Barack Obama has also weighed in, calling Mrs Merkel on Tuesday night to stress the importance of tackling the debt crisis in sustaining the global economic recovery.

The International Monetary Fund has also called on European leaders to take swift and decisive action.

Delaying such action further would be “very costly” for the world economy, it said.

Spending cuts

However, there are divisions among policymakers about the best way to resolve the crisis.

There appears to be consensus on the need for a new loan agreement, analysts say, thought to be similar in size to the 110bn euro ($ 156bn; £97bn) package agreed last year.

However, there is also a growing consensus that this will merely act a sticking plaster, and that the fundamental problem of Greece’s indebtedness needs to be addressed.

Athens has already implemented a raft of wide ranging austerity measures, including spending cuts and tax rises, and earlier this month agreed to further drastic action to cut its debt.

Bank tax

But there is a growing sense that these will not be enough. The only way to resolve the problem is to restructure Greece’s debts, many observers argue.

Germany has proposed allowing Athens more time to repay, effectively rolling over existing debts into new bonds.

It wants private investors, largely banks, to participate in this restructuring.

But the European Central Bank has strongly opposed this plan, arguing that such a rollover would constitute a default in the eyes of the international credit ratings agencies and, as such, would undermine investor confidence and the euro itself.

An alternative way get private investors to contribute to any aid package would be to introduce a new bank tax.

Reports suggest leaders will discuss precisely such a tax, even though this would prove hugely unpopular with the banks.

It is these divisions that explain Mrs Merkel’s attempts to dampen expectations ahead of the summit.

The summit will take place in Brussels at 1300 local time.

French President Nicolas Sarkozy is meeting German Chancellor Angela Merkel

French Finance Minister Francois Baroin has stressed the need for Europe to send a “strong message” that it will act decisively to contain the Greek debt crisis.

He said Thursday’s summit of European leaders should pave the way for further assistance to the debt-ridden country.

The International Monetary Fund has called on Europe to take strong action.

Mr Baroin’s comments came as European banking shares recovered strongly from sharp falls earlier this week.

In France, Societe Generale and BNP were up about 3%, while in Germany, Deutsche Bank climbed 2.8% and Commerzbank rose more than 2%.

Banking shares fell sharply on Monday on debt fears and concerns about the credibility of last Friday’s Europe-wide bank stress tests.

Debt rollover

All eyes are now on Thursday’s summit, with French President Nicolas Sarkozy travelling to Berlin to discuss the debt crisis with German Chancellor Angela Merkel ahead of the meeting.

“This meeting at the highest decision-making level should allow us to take a further essential step to establish the conditions of a new package for Greece, that will make Greece’s debt more bearable,” Mr Baroin said.

“A strong message should be made tomorrow.”

However, divisions remain among European leaders, and Mrs Merkel has played down the chances of Thursday’s emergency eurozone summit resolving Greece’s debt crisis.

Mrs Merkel wants private investors to contribute to any aid package by agreeing to roll over loans they have made to Greece.

However, the European Central Bank disagrees, arguing that such a rollover would constitute a default in the eyes of the international credit ratings agencies and, as such, would undermine investor confidence and the euro itself.

The stress test on banks has failed to calm nerves over Europe’s debt crisis

Stock markets fell on Monday as a healthcheck on banks failed to stem worries about Europe’s debt crisis.

Financial shares were heavy fallers, with Royal Bank of Scotland down 3.8% and BNP Paribas 3.1% lower.

In early trading the FTSE 100 index fell 0.9%, France’s Cac 40 shed 1.4%, and Germany’s Dax was 1.3% down.

On Friday, five European banks failed a stress test on their finances, while another 16 were said to be near the danger zone.

Meanwhile, the price of gold topped $ 1,600 an ounce for the first time as investors put money into the haven commodity.

Concerns among investors have also been fuelled by the Obama administration’s failure to agree a debt-ceiling deal.

The US risks defaulting on its debts unless Congress can agree new rules that will allow Washington to borrow more money.

The austerity measures demanded by the IMf and EU have caused outrage in Athens

Greece’s enormous debts are sustainable but on a “knife’s edge,” according to the International Monetary Fund.

A 110bn-euro (£96bn) rescue package for Greece is being implemented but investors still fear a default.

Given the situation, Greece must stick to its reform programme, IMF Athens mission chief Poul Thomsen said.

His comments came as UK Deputy Prime Minister Nick Clegg said he was “incredibly worried” about the Greek debt crisis.

Greece under Prime Minister George Papandreou has passed several rounds of austerity measures, including tax increases, pay cuts, privatisations and public sector redundancies, to get aid from the IMF and the European Union.

Poul Thomsen, the IMF’s mission chief to Athens, said that Greece must now implement these reforms.

“Policies must be applied as planned, or the sustainability of the debt will be placed in doubt,” he told Greek newspaper Ethnos.

“The Greek debt is sustainable but it is, as we say, on a knife’s edge.”

US Secretary of State Hillary Clinton said on Sunday on a visit to Athens that “the US strongly support the Papandreou governement’s determination to make the necessary reforms to put Greece on a sound financial footing”.

Greece has more than 350bn euros of debt, and the IMF warned last week than it needs an additional 100bn in aid on top of last year’s bail-out to avoid a default.

The eurozone members will hold a special summit on 21 July to discuss the debt crisis and provide fresh aid for Greece.

‘Direct impact’

Mr Clegg told the BBC on Sunday that the crisis is “immensely serious”.

“This has a direct impact on British jobs and the livelihood of people in this country,” he said.

“I believe we should play an active role behind the scenes, because we are not a member of the euro, to help eurozone members make the reforms necessary to make a strong, prosperous eurozone in the future.”

The Irish Republic and Portugal have had bail-outs since Greece received its aid package, and markets last week suggested they were worried that Italy will be the next.

On Friday, the European Banking Authority (EBA) said eight out of 90 European banks have failed stress tests designed to ensure they can withstand another financial crisis.

None of the tests included what would happen to the banks if Greece defaulted on its debt.

Five Spanish banks failed, as well as one in Austria and two in Greece.

The news came just as Italy’s parliament approved a 70bn-euro austerity package.

According to the Bank for International Settlements, UK banks hold a relatively small $ 3.4bn (£2.1bn) worth of Greek sovereign debt, compared with banks in Germany, which hold $ 22.6bn,

The euro has fallen and the borrowing costs for Spain and Italy rose

European stock markets fell heavily on Monday, weighed down by fears that the eurozone’s debt crisis was spreading.

In late afternoon trading, Italian shares were down more than 4%, France’s Cac index fell 3%, Germany’s Dax fell 2%, and London was down 2%.

Banks across Europe were hit hard, with Italy’s Unicredit down 10%.

Eurozone finance ministers were holding talks on a new aid plan for Greece, but this was overshadowed by fears of contagion spreading to Italy and Spain.

The euro fell, while borrowing costs for Spain and Italy rose to 12-year euro-era high.

“There are tensions across the eurozone, we must find a solution,” Belgian minister Didier Reynders said to reporters on arrival at the finance ministers’ meeting.

The credit ratings agency Moody’s Investors Service has downgraded Portugal’s debt to junk status.

The agency said there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again.

Portugal, Greece and the Irish Republic were all given bail-out loans to give them time to repair their economies so they could borrow money normally again.

But Greece has already had to start negotiating a second bail-out.