Crisis-hit Italy and Spain block EU deal on growth

In a cry for urgent help, embattled Italy and Spain joined forces at a tense EU summit to hold up a growth pact unless partners acted swiftly to fight off market pressure on their economies.

The strong-arm tactics threatened to derail a crucial two-day summit that began Thursday to launch a stimulus package and pave the way for deeper economic integration to prevent a eurozone breakup that would rock the world economy.

In a surprise move, Italian Prime Minister Mario Monti and Spanish counterpart Mariano Rajoy on Friday insisted that any deal on a package to stimulate output must be tied to immediate measures to bring down soaring borrowing costs.

"There are two countries that are very keen to ensure there is agreement on long-term measures and short-term measures," EU president Herman Van Rompuy told a news conference after the first seven hours of talks.

"I wouldn't say there is a blockage, discussions are ongoing," he said after announcing that EU leaders has agreed to 120 billion euros ($150 billion) of growth-stimulating measures but had yet to conclude a full deal.

A European diplomat said: "Italy and Spain have taken the pact hostage."

The impasse prompted the 10 leaders of non-euro nations to go back to their hotels shortly after midnight, leaving their 17 eurozone partners to sort out their differences before full EU talks were due to resume on Friday morning.

"We are in favour (of the growth pact), it is necessary, but it is not urgent. What is urgent and more important for us is the sustainability of the debt," a Spanish official said.

French President Francois Hollande said Monti and Rajoy had warned him about their position even though both leaders had backed the growth pact at a Rome summit with German Chancellor Angela Merkel last week.

"I can understand them. They could not give a partial agreement as they wanted a global deal because for them, the stability measures must be a priority," Hollande told reporters.

"We need Italy and Spain to be able to have lower interest rates because it would relieve the eurozone," he said.

Merkel, meanwhile, cancelled a press conference.

Eurozone leaders were originally slated to discuss Spanish and Italian woes at a lunch on Friday but Hollande indicated they would strive to reach a solution during the early morning talks.

With investors charging ever higher interest rates to lend to Rome and Madrid, Monti and Rajoy want the eurozone's rescue fund to buy their country's bonds in order to reduce their borrowing costs.

Merkel, however, is cool on the idea and insists that any intervention by the European Financial Stability Facility (EFSF) must be accompanied by reforms in the countries getting the help.

Ratcheting up the pressure, Rajoy warned his country could not long withstand high borrowing costs imposed by bond markets and cautioned that key bodies were running out of cash.

"There are many Spanish public institutions that cannot finance themselves," he warned before the meeting began.

Just hours before, Italy had to pay higher rates on five and ten-year debt, amid ongoing market tension as the crisis creeps from the edges of the eurozone to the centre.

"There will be a domino effect across all of Europe. We need emergency measures," said Belgian Prime Minister Elio Di Rupo.

EU leaders are under worldwide pressure to put a lid on more than two years of a crisis that has forced Greece, Ireland, Portugal, and last week Spain and Cyprus, to seek rescues.

The Spanish-Italian stand overshadowed a bid by Van Rompuy to get leaders to agree on a roadmap to further integrate the single currency area, with a banking union and steps to centralise control over budgets.

France has pressed for the eurozone to consider pooling debt by issuing so-called eurobonds, but Merkel opposes the idea, stressing that budget discipline must become the norm across the bloc first.

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