Banks operating in the eurozone have dismissed a Franco-German proposal to tax financial transations, saying that it would not stabilise the markets and could distort them.

The Association for Financial Markets in Europe (AFME), which represents top banks, also said on Wednesday that a tax would increase costs for European industry and affect growth.

The proposal was announced on Tuesday, following talks in Paris between French President Nicholas Sarkozy and German Chancellor Angela Merkel. Included in the proposal was a call on 17 eurozone countries to commit to balancing their finances and write that goal into their constitutional law by summer 2012.

While neither Sarkozy nor Merkel elaborated on how such a tax would work, Austria, Italy and Spain signaled that they would support the measure.

Ireland's finance minister, Michael Noonan, said any new tax must apply to all 27 members of the EU and not just the 17 members of the eurozone. However, Britain is opposed to the EU going at it alone.

The British Bankers' Association, a lobby group, said: "The UK has taken the position that such a tax would only be viable if implemented on a global scale. Otherwise the consequences would be a distortion in the global markets."

Germany's cooperative banking association said that the tax would fail to stabilise the markets if only the eurozone adopted the measure.

"For all the legitimate efforts at stabilising financial markets, we feel a financial transaction tax which is
limited to the euro zone is not effective," said BVR.

Bonds sales rejected

France and Germany, Europe's largest economy, are under pressure to shore up the eurozone and restore financial market confidence.

The turmoil in the markets has raged for more than a year despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.

Merkel played down calls for the introduction of eurobonds - jointly guaranteed debts of the 17 eurozone governments - as a solution to the crisis.

Many experts had suggested before the meeting that the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the eurozone area to issue joint bonds.

Some economists say eurozone countries will inevitably come around to accepting the idea.

"The market was obviously fixated on whether they would perhaps improbably agree to support the notion of eurobond issuance, where Germany and France would agree to underwrite and guarantee some of the debt issuance for some of the other members," said Peter Buchanan, a commodities analyst in Ontario, Canada.

"Unless you get that, the general conclusion is that the crisis over there is not very much closer to a solution than it was a couple of weeks ago."

Germany's economy became the focus on Tuesday after economic data revealed a sharp slowdown in growth to just 0.1 per cent in the second quarter of 2011.

The eurozone as a whole posted a meagre 0.2 per cent growth in the second quarter.

"The German data are certainly disappointing," said Juergen Michels, chief euro-area economist at Citigroup in London. "Everything is pointing toward stagnation in the euro area."