The French finance ministry has 'formally' denied rumours that France was heading for a downgrade of its prized AAA credit rating.
The announcement came just hours after President Nicolas Sarkozy promised new measures to slash France's public deficit amid fears the country could be next after the United States to suffer a top credit-rating downgrade.
Fitch ratings agency confirmed this afternoon that France was retaining its top AAA rating.
Mr Sarkozy interrupted his holiday to hold an emergency government meeting about the uncertainty on world financial markets.
In a statement, his office said that he was holding a meeting this morning in the Élysée Palace with select ministers and the head of the French central bank 'about the economic and financial situation'.
Mr Sarkozy and some other European leaders have come under criticism for remaining on their traditional August holidays as turmoil gripped financial markets.
He had been on the French Riviera earlier this week.
In Paris, the CAC stock market index fell by 4.7% this afternoon, with bank shares plunging on the rumours of a possible downgrade.
Shares in Societe Generale plunged 20%.
The Dow closed down 4.6%, the S&P 4.4% and the Nasdaq 4.1%.
Many analysts believe investors will remain wary about the US central bank's expectation that the US economy will remain weaker for longer than previously forecast.
World stock markets have been falling since the start of this month on fears of a slide back into recession for the US, as well as the ongoing eurozone debt crisis.
While the US rating downgrade from Standard & Poor's was a big symbolic blow, investor confidence has also been shaken by data suggesting the world's biggest economy was stalling and even second-ranked China was facing headwinds.
There was some reassurance from China today, with data showing export growth accelerated in July, outpacing analysts' consensus forecasts.
Cyprus will need bail-out - Fitch
Meanwhile, Fitch Ratings said today that Cyprus will probably be unable to meet its financing requirements during the rest of this year and early 2012 and will likely need an EU bail-out.
Fitch made the forecast in an announcement that it had downgraded Republic of Cyprus long-term foreign and local currency issuer default ratings to BBB from A-, with the outlook negative on long-term IDRs.
It said financing requirements in the last five months of this year will be close to €1.1bn and another €1.2bn needed in January and February.
‘Under current market conditions, Fitch believes that the government will be unable to meet this target without recourse to external official assistance,’ while adding that, ‘at this juncture, Fitch anticipates that such assistance is likely to be forthcoming.’
Cyprus has already recently been downgraded by the other two major international ratings agencies, Standard & Poor's and Moody's.
Berlusconi promises emergency decree
Italian prime minister Silvio Berlusconi today promised an emergency decree to approve austerity measures agreed with the European Central Bank but faced union opposition over concern that the cuts would hit ordinary Italians.
Mr Berlusconi made the promise to pass the decree on budget measures at a special cabinet session, expected by 18 August, during talks in Rome attended by employers, trade union leaders and government ministers, an official at the meeting said.
Mr Berlusconi agreed last week to speed up budget measures passed last month after heavy pressure from the ECB and European partners including Germany and France.
Susanna Camusso, head of the CGIL, Italy's biggest union federation, said the government had not come up with adequate proposals and repeated her call for ECB demands on deficit reduction steps to be made public.
‘If the austerity budget hits the usual suspects we will mobilise to change it,’ Ms Camusso told reporters.
