EU leaders debate "a big leap forward" to strengthen their union and save the euro at a two-day summit starting Thursday, but divisions may scuttle efforts to shore up the single currency.

European Union heads of state and government gather from 3:00 pm (1300 GMT) as the debt crisis, now in its third year, widens to Cyprus and Spain after contaminating Greece, Portugal and Ireland.

And with Italy, the third largest eurozone economy Italy too under threat, the EU is under pressure from world leaders to prevent a collapse of the single currency that would have unfathomable global repercussions.

Europe's leaders are expected to agree a growth pact to revive the continent's flagging economies and propel the 27-nation bloc towards greater union, the first step being a banking union.

France and Germany agree "we need more Europe, we need a Europe that works, the markets are expecting this, and we need a Europe whose members help each other," German Chancellor Angela Merkel said after meeting French President Francois Hollande on the eve of the talks.

"We both want to deepen economic, monetary -- and in the future political -- union, to arrive at integration and solidarity," Hollande said.

The eve-of-summit statements followed weeks of divisions between the leaders of the EU "big two" over ways out of the relentless debt crisis.

This 19th summit since 2010 "is perhaps the most important since the foundation of the EU" 60 years ago, said the head of the global IFF bank lobby Charles Dallara.

"It's about winning back the trust and confidence of long-term investors," he told the German weekly, Die Zeit. "I'm afraid they'll only allow themselves to be convinced by comprehensive solutions."

But in Spain, Prime Minister Mariano Rajoy warned that the eurozone's fourth economy was running out of time and could not finance itself for long at the high rates of almost 7.0 percent it now pays on markets.

"There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries," he said.

Italy too fears a freefall and Prime Minister Mario Monti has warned he is ready to stay until Sunday if necessary to come up with answers to the crisis that will satisfy markets ahead of Monday's opening.

Among short-term solutions is an ambitious pact to kickstart growth by injecting 130 billion euros ($163 billion) into floundering economies facing record unemployment of 11 percent.

For the longer term, leaders will be asked to sign on to a roadmap toward tighter economic and monetary union over the next decade, with the first step a banking union to be agreed by the end of this year.

The worry is whether this will be enough to satisfy markets and whether Hollande and Merkel can overcome their differences.

"Unless France and Germany can soon agree on a grand bargain, disaster may loom," said analyst Charles Grant of the Centre for European Reform.

Under increasing pressure from partners in the larger eurozone economies, Merkel says there can be "no quick, no easy" solutions, no "magic formula".

Hollande on the other hand rejects Merkel's austerity-driven approach to solving the crisis and her insistence that budgetary discipline come before solidarity.

The new French leader, along with Italy's Monti, notably favours dipping into the eurozone's 500-billion-euro rescue pot to help Spain's distressed banks or buy bonds of virtuous economies whose borrowing costs are soaring due to market pressure.

But Merkel is firmly opposed to throwing money at struggling banks or poorly run economies.

Commenting on eurobonds, a way of pooling European debt, Merkel said Wednesday: "I consider them wrong and counterproductive."

She is unlikely to be favourable either to reports that Greek Prime Minister Antonis Samaras will ask EU partners to "respond to sacrifices" by changing the conditions of the country's second EU-IMF bailout.