|Sarkozy and Merkel are due too meet on Sunday to discuss how to strengthen regional banks [Reuters]
Credit-rating agencies have cut the ratings of 12 European banks, adding to the mounting pressure their respective governments face to take decisive action on supporting the industry.
Moody's Investors Service downgraded on Friday its ratings on nine Portuguese banks, citing the increased asset risk linked to their holdings of Portuguese government debt and the sovereign downgrade of Portugal in July.
The same agency also cut the ratings of two leading British banks, citing a likelihood of less state support in a future crisis as Britain sought to reassure investors the sector was well capitalised.
Meanwhile, Standard and Poor's downgraded the core banks of Franco-Belgian financial group Dexia - the bank which has come to epitomise the European debt crisis through its unusually large exposure to the debts of the eurozone's weakest country, Greece.
Rival Fitch placed Dexia bank entities on rating watch negative.
Portugal's biggest listed bank, Millennium bcp, fell 2.8 per cent on the downgrade news.
Moody's said it expected a further deterioration of Portuguese banks' domestic asset quality due to a weak economic growth outlook and government austerity measures, as well as liquidity strains due to a lack of access to wholesale funding.
Portugal is enacting steep tax increases and spending cuts under a $105bn EU/IMF bailout designed to shore up its public finances and restore investor confidence.
Banks have to boost their capital ratios under the bailout terms after becoming overly dependent on European Central Bank funding. Moody's cut its credit rating on Portugal by four notches to Ba2 in July.
Al Jazeera's Jonah Hull reports on the financial crisis
"The key driver for the downgrades of most banks' debt and deposit ratings is Moody's assessment of the deterioration of their unsupported financial strength," the ratings agency said.
The six banks whose standalone ratings and debt and deposit ratings were cut are the state-controlled Caixa Geral de Depositos, top listed bank Millennium bcp, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Caixa Economica Montepio Geral.
Among the major listed banks, Moody's cut Millennium bcp's standalone rating by two notches to B1 - which is four notches below investment grade - citing concerns over its high reliance on wholesale funds, its exposure to Greece via its Greek subsidiary and weak profitability.
Britain, with its own currency, sits aloof from the eurozone sovereign debt crisis itself, but banks had been on review for possible downgrade as part of a trend where state support for lenders dates back to the 2008 crisis.
Concern is also growing that its banks may need more capital as part of a wider European move to shore up the industry.
Moody's cut its rating on Royal Bank of Scotland by two notches, downgraded Lloyds by one notch, and cut its ratings on Santander UK, the UK arm of Spain's Santander, the Co-operative Bank, Nationwide Building Society and seven other smaller British building societies.
Standard and Poor's downgrade of Dexia by one notch cited difficulties in securing wholesale funding and the need for increased collateral.
It comes at the end of a dismal week for the bank's shares and in the run-up to a board meeting over the weekend to draw up a rescue plan that will break up the bank.
Bank recapitalisation needs are at the heart of the issue that has led to downgrades across the sector in Europe in recent weeks and months, even though the sector was widely refinanced after the 2008 crisis.
UK banks have raised over $120bn in the last three years, forced by the government to raise low capital levels.
Over the same period, German banks have raised about $40bn, Italian banks have raised $29bn and French banks - seen as most in need of fresh funds - have raised $22bn, according to data from Reuters news agency.
The downgrades come ahead of crucial summit talks on Sunday between Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, over how to strengthen regional banks.