Oct. 1 (Bloomberg) -- France and Germany clashed over whether to create a fund to bail out banks pounded by the global credit crunch, kicking off a European version of the debate that has been raging in the U.S. for two weeks.

French Finance Minister Christine Lagarde told the German newspaper Handelsblatt today that a ``rescue package'' was needed to help ``smaller'' European Union states ``threatened with a banking failure.'' Germany immediately opposed the proposal, with finance ministry spokesman Torsten Albig saying his government ``doesn't support the plan.''

The conflict between the two biggest euro-region economies undermined efforts to build a consensus European response to the financial crisis as a recession looms. Other fissures have emerged, when Ireland's decision to guarantee bank deposits and debts prompted criticism by British bankers today that it ``distorted competition.''

Fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy hit Europe this week, with France, Belgium, Luxembourg and the U.K. rescuing four lenders and Italian Prime Minister Silvio Berlusconi today pledging to prevent losses for depositors.

In the U.S., Treasury Secretary Henry Paulson proposed a $700 billion bailout on Sept. 20 that lawmakers have struggled to pass. The House of Representatives rejected a version of the plan two days ago; the Senate is preparing to vote on another version tonight in Washington.

Sarkozy Meeting

French President Nicolas Sarkozy may propose the bailout fund at an Oct. 4 meeting with leaders of Great Britain, Italy and Germany, as well as European Central Bank President Jean- Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker. The proposed fund would total 300 billion euros ($422 billion), Reuters reported, citing an unidentified European government official.

Lagarde, speaking at an event in Paris, disputed that figure, without saying whether it would be bigger or smaller. Officials at the French president and prime minister's offices declined to comment on the Reuters report.

European Union regulators in Brussels appealed today for governments not to act unilaterally. Charlie McCreevy, EU financial-services commissioner, proposed more coordinated oversight and requirements that banks hold more capital for asset-backed bonds.

``Capital and strong financial institutions are the lifeblood of an economy,'' McCreevy said in a Bloomberg Television interview in Brussels.

The London interbank offered rate, or Libor, that banks charge each other for one-month loans in euros climbed to an all-time high of 5.07 percent today, while the equivalent dollar rate surged to the highest level since January, the British Bankers' Association said. Overnight dollar loans slid from yesterday's record of 6.88 percent after funding constraints tied to the end of the third quarter passed. The Libor-OIS spread, a gauge of cash scarcity, jumped to a record.

To contact the reporters on this story: James Hertling in Paris at jhertling@bloomberg.net

Last Updated: October 1, 2008 15:10 EDT