Germany and France put mountains of cash on the table yesterday as they led continental Europe in an offensive to rebuild trust in banks with state guarantees worth more than €1,000 billion (£780 billion).

Angela Merkel, the German Chancellor, and President Sarkozy joined Gordon Brown in calling for a deep reform of the global financial system after the dust settles. “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.

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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.

Mrs Merkel presented a rescue package that will provide €400 billion in bank guarantees and a further €100billion in state funds to recapitalise banks. Mr Sarkozy detailed a plan that includes up to €320 billion to guarantee interbank 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 €100billion 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 eurozone were announcing similar measures.

Under pressure from the European Commission, the Republic of Ireland agreed to include big 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 bailout 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 January.

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

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