Germany and France put mountains of cash on the table today as they led continental Europe in an offensive to rebuild trust in banks with state guarantees worth over €1trillion (£780 billion).

Chancellor Angela Merkel and President Sarkozy, chiefs of the two big euro-zone economies, also joined Gordon Brown in calling for a deep reform of the global financial system after the dust settles from the autumn earthquake.

“When calm returns, those who have sinned will be punished,” Mr Sarkozy said.

In Washington, Silvio Berlusconi, the Italian Prime Minister, said that President Bush had agreed on the need for an emergency summit of the G8 group of big industrialised nations plus Russia within weeks.

World markets initially soared as European governments pumped billions into crippled banks. Central banks in Europe also mounted a new offensive to restart lending by supplying unlimited amounts of dollars to commercial banks in a joint operation.

Dominique Strauss-Kahn, the French chief of the International Monetary Fund, voiced optimism for the first time since the financial turmoil intensified with the collapse of Lehman brothers last month. “Thanks to the decisions that have just been taken, the peak of the crisis is perhaps behind us,” he said.

Mrs Merkel presented a rescue package that will provide €400 billion in bank guarantees and a further €100 billion in state funds to recapitalise banks. Mr Sarkozy detailed a plan that includes up to €320 billion to guarantee inter-bank lending up to December next year and €40 billion to inject capital into needy banks. In Spain, José Luis Rodríguez Zapatero, the Prime Minister, said that the Government would set aside a maximum of €100 billion to cover bank lending.

Italy said that it would spend “as much as necessary” to safeguard the country’s banking sector. Austria announced up to €85 billion in guarantees and up to €15 billion in equity to prop up the banking sector. Other members of the 15-nation euro-zone were announcing similar measures to shore up their financial systems.

Under pressure from the European Commission, Ireland also agreed to include major foreign-based banks in the blanket guarantee for deposits that it announced two weeks ago.

Ireland’s unilateral guarantee started a free-for-all in the eurozone which came under control on Sunday when Mr Sarkozy organised the co-ordinated bail-out with advice from Mr Brown. The French President said yesterday that extreme times demanded bold remedies. “The biggest risk at the moment would have been to lack audacity,” he said.

Like Mr Brown, Mr Sarkozy has been praised at home and abroad for his handling of the crisis. “Super-Sarko”, a politician who thrives as a crisis-manager, landed the role of chief European fixer because France holds the rotating six-month Union presidency until next January.

He is to seek a co-ordinated approach among all 27 members at the Union’s autumn summit which opens in Brussels on Wednesday. If the rescue appears to be holding up, Mr Sarkozy wants the EU leaders to focus on the economic fall-out and on ways of limiting what appears to be a looming recession in Europe.

Mr Sarkozy insisted that there would be little long-term cost to the French tax-payer because the bail-out would be financed by state-guaranteed borrowing and banks would pay for the protection that they were given. State-owned shares would later be sold, probably for a profit, he said.

Mr Sarkozy was gratified, he said, that “United Europe has done more than the United States in terms of the sums committed” to tackling the crisis. Europe must now convince the United States of the need to “rebuild the foundations of capitalism”. France wanted to support entrepreneurs and not speculators, he said.

Mrs Merkel, who had been reluctant until last weekend to join in a pan-European rescue plan, said that Germany’s 500 billion euro package was dramatic.

“We are taking drastic action, no question about it... so that what we have experienced is not repeated,” she said.

“Our citizens will be protected by today’s package against even stronger effects... If the state had not intervened, the consequences would have been incalculable - above all for our citizens, for savers and for the economy.”

Both Mrs Merkel and Mr Sarkozy said that banks receiving capital would have to comply with conditions, including limits on management pay and requirements to keep credit moving to small and medium-sized business.

“We have today laid the first foundation stone for a new financial market constitution,” Mrs Merkel said after her Cabinet settled the plan, which should be passed by both houses of Parliament by Friday.

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