Germany urged Europe Wednesday to recapitalise its banks where necessary to prevent the eurozone debt crisis from spreading as the IMF warned the EU to get its act together and head off recession.

As Greek police tear-gassed protesters in the latest strike over ever-deeper austerity measures, Chancellor Angela Merkel said a new round of bank bailouts were "justified, if we have a joint approach."

She was speaking in Brussels during a visit to EU headquarters, after France and Belgium agreed to provide aid to Dexia, the first European bank to be dragged down by the eurozone debt crisis.

A credit crunch stemming from exposure to increasingly risky sovereign debt has deprived the banking sector of crucial funding and European Union partners are trying to coordinate governments' actions to erect a financial firewall.

As the problems stemming from Greece's debt burden morph into a crisis threatening global economic growth, Merkel said there was no "magic wand" at Europe's disposal to resolve the problems.

IMF Europe director Antonio Borges said that "somewhere between 100-200 billion (euros) will be more than enough" to back up the banks, adding it was "not that much money ... by no means beyond reach."

Borges was in Brussels issuing the International Monetary Fund's latest report on European economic prospects.

Neither he nor his report minced their words after two days of hectic talks in Luxembourg that kept Greece waiting to see if promised bailout funds, on hold for the past month, will come through and save it from default.

The IMF urged Europe to balance growth with austerity as it called for a "more than overdue" solution to the crisis, warning of recession next year if it fails to find the right recipe.

A durable solution would require "some difficult decisions" to improve crisis management and convince sceptical markets that Europe can speak as one on economic and monetary affairs, the IMF said.

Borges said that Europe should look closely at the need to help growth.

"If ever there was a more significant recession in Europe, and I hope that is not the case but we cannot exclude it, then ... all those countries with fiscal leeway might want to consider that."

The latest data is getting worse almost by the day.

A closely-watched eurozone growth indicator for September showed a first contraction since July 2009, fresh from US merchant bank Goldman Sachs predicting a "light recession."

There is now a "sense of urgency" for action, EU economic affairs commissioner Olli Rehn told the Financial Times, adding that eurozone nations were seeking a coordinated response to head off a banking crisis.

European shares rebounded sharply Wednesday on hopes leaders will come up with a solution and so avoid a repeat of the 2008 global financial crisis sparked by the collapse of US investment bank Lehman Brothers and which plunged the world into a deep recession.

In the Greek capital, civil servants staged a 24-hour walkout in protest at a government plan to sideline 30,000 staffers to reduce the deficit in return for the next tranche of debt rescue funding.

The EU again demanded more sacrifices from Greece at the Luxembourg meetings and also warned banks they may have to shoulder more losses as part of the resolution of the debt crisis.

Borges, for his part, said commitments made by Greece under a follow-on bailout agreed in July -- still stuck on the drawing board -- should focus on growth-enhancing reforms, rather than simply strangling the public sector.

After Italy suffered a severe Moody's downgrade in its credit rating, Borges also suggested the IMF could intervene on secondary bond markets to support stressed member states.

That is something so far reserved only for the European Central Bank and, soon, its rescue fund.

The European Financial Stability Facility moved a step closer to acquiring those powers when the Netherlands confirmed it will vote on them Thursday, although last hold-out Slovakia is still struggling with internal coalition politics before approving EFSF changes.

British Chancellor of the Exchequer George Osborne called on Tuesday for the eurozone to "reflect on the reality" of its troubles, saying the sovereign debt crisis "requires more capital in some eurozone banks."

On Tuesday, Dexia's shares plunged 37 percent before France and Belgium stepped in to guarantee depositors and creditors -- leading analysts with ING of the Netherlands to warn Dexia could "morph into Europe’s Lehman."