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Germany's second-largest mortgage lender, Hypo Real Estate, said a bail-out deal had fallen apart.

Correspondents say its failure would put further strain on financial institutions in other countries.

The news came as EU leaders at a Paris summit stopped short of offering a US-style rescue plan to banks.

Hypo Real Estate, which has large amounts of bad debt, has suffered from the credit squeeze in international markets.

The bank said a consortium of German financial institutions involved in a government-led rescue plan pulled out of the negotiations after refusing to come up with nearly 36bn euros ($50bn; £28bn) for a bail-out.

The reasons why the consortium pulled out are unclear but a Hypo Real Estate spokesman said the property lender was fighting for its survival.

Some analysts are saying the bank will not last more than a few days without a rescue package, so action must be taken before the markets open on Monday.

Another meeting of government representatives and private bankers is expected to take place on Sunday.

Executive 'sanctions'

Correspondents say if Hypo Real Estate does collapse it could plunge already volatile markets even further into debt.

News of the failed plan came as leaders of the major European economies met in the French capital for talks hosted by President Nicolas Sarkozy.

Britain, Germany, Italy and France all agreed to work together to support financial institutions but did not agree to set up a big rescue fund similar to that of the US.

They decided instead to seek a relaxation of the EU rules governing the amount of money individual states can borrow.

The leaders also issued a joint call for a G8 summit "as soon as possible" to review the rules governing financial markets.

Mr Sarkozy announced a series of other measures - including unspecified action against the executives of failed banks.

Speaking after the meeting at a joint news conference, he said the four had agreed that the leaders of a financial institution that had to be rescued should be "sanctioned".

The French president added: "Each government will operate with its own methods and means, but in a co-ordinated manner."

Meanwhile German Chancellor Angela Merkel called on EU countries not to take steps at home that could cause problems for other member states.

The Irish and Greek governments have been criticised within the EU for deciding to act independently by guaranteeing to protect all savings deposited in their banks.

'Trial by fire'

UK Prime Minister Gordon Brown, meanwhile, called on European leaders to send the message that "no sound, solvent bank should be allowed to fail through lack of liquidity".

He also said the meeting had agreed to ask the European Investment Fund to release 15bn euros ($21bn; £12bn) in loans to help small businesses operate.

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn, had earlier urged EU action, saying the financial crisis was presenting Europe with a "trial by fire".

He held talks with Mr Sarkozy before the EU leaders' meeting and said although the EU was a more complex organisation than the US, Europe needed to take "concerted collective action".

Mr Strauss-Kahn said it had to be "indicated to the markets... that European countries will not react as every man for himself".

He also said he would be scaling back his world economic growth forecasts.

Calls for European action followed the bail-out of both Bradford and Bingley in the UK and Fortis Bank by the governments of Belgium, Luxembourg and the Netherlands.

But the president of the European Parliament has criticised the summit, warning that the leaders of Europe's four largest economies have no power to decide for the entire European Union.

(BBC)

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