European Union officials were working out the details of a financial support mechanism on Saturday to prevent Greece’s debt turmoil spreading to Portugal and Spain, ready for approval by EU finance ministers on Sunday.

The leaders of the 16 countries that use the single currency said on Friday after talks with the European Central Bank and the executive European Commission that they would take whatever steps were needed to protect the stability of the euro area.

Italian Prime Minister Silvio Berlusconi cancelled a trip to Russia on Saturday to continue consultations with EU leaders over the crisis, a government source said.

Financial markets have been pounding euro zone countries with high deficits or debts as well as low economic growth, threatening to force Portugal, Spain and Ireland into a position where, like Greece, they would need to seek financial aid.

The euro zone leaders, who have been accused of heightening market uncertainty with a lack of action, agreed to accelerate budget cuts and ensure deficit targets are met this year.

But they also decided, under pressure from the markets, to ask all 27 EU countries to agree a financial mechanism to ring-fence the Greek crisis before markets open on Monday.

“WORST CRISIS”

“The euro zone is going through the worst crisis since its creation,” French President Nicolas Sarkozy said after Friday’s euro zone summit in Brussels.

“The leaders have decided to put in place a European intervention mechanism to preserve the stability of the euro zone. The decisions taken will have immediate application, from the point that financial markets open on Monday morning.”

“If the domino effect begins, no economy is safe,” Finnish Prime Minister Matti Vanhanen told the Finnish broadcaster YLE on Saturday.

Euro zone sources said late on Friday that the mechanism could be funded by bonds issued by the European Commission with guarantees from euro zone states.

No details have been disclosed so far, but the sources said EU law provided a legal basis for such a mechanism.

The treaty governing the European Union says that if a member of the 27-nation bloc is in difficulties caused by circumstances beyond its control, EU ministers may, under certain conditions, grant it financial assistance.

“Two mechanisms have been agreed — one based on article 122.2 of the Treaty saying the council can help a member state with serious difficulties,” one of the sources said.

“The other will enable the European Commission to go on the markets and get money with an explicit guarantee of the member states and an implicit guarantee of the ECB (European Central Bank,” the source added.

A second source said: “The details of this mechanism will be agreed by Sunday and the idea is to trigger both on Sunday.”

EMERGENCY LOANS

Friday’s EU summit approved $110 billion euros ($147 billion) in emergency EU/IMF loans to Greece over three years to help it over a budget crisis in exchange for austerity measures so sharp that they have already sparked violent protest.

But fears that the loans might not be enough to prevent a Greek default and avert a broader economic crisis kept world stocks near a three-month low, despite strong U.S. jobs data.

Group of Seven finance ministers discussed the situation in a conference call on Friday after U.S. Federal Reserve officials expressed concern, and agreed to monitor the markets.

Earlier on Friday, the German parliament approved its share of the Greek rescue, the largest contribution by a euro zone country. The Dutch parliament also approved its part of the deal and Italy’s cabinet has given initial approval.

But five German academics filed a legal challenge, reflecting widespread German public opposition to the measure.

Germany’s highest court on Saturday rejected their request to block the immediate release of a German loan to Greece, which the academics argued was not provided for under EU treaties and would give rise to inflationary policies.

A group of elder statesmen said in a report on Saturday that the EU was at a critical point in its existence and would struggle for influence in 20 years’ time unless it found unity and firm leadership, especially in the economic area.

“Strengthening economic governance in the EU is urgently needed if we are to avoid the asymmetric shocks which derive from the co-existence of our monetary union and single market with divergent economic policies,” said the 35-page report by the Reflection Group, 12 political and business leaders asked to analyse the future challenges faced by the EU.

(Writing by Kevin Liffey; editing by Myra MacDonald)