The French president and German chancellor are determined to change European rules to impose mandatory penalties on countries that exceed deficit targets, aiming to restore market confidence and prevent a sovereign debt crisis spiralling out of control.

Citing "continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis," S&P threatened to cut the credit ratings of 15 countries, including Germany and France, by 1-2 notches.

It also warned of slowing growth amid so much austerity, predicting a 40 percent chance of a fall in euro zone output.

A downgrade could automatically require some funds to sell bonds of affected states, making those countries' borrowing costs rise still further.

Merkel brushed off the threat.

"What a ratings agency does is its own responsibility," she said, promising that European leaders would make decisions at this week's summit that would restore confidence.

Her party's budget spokesman, Norbert Barthle, put an optimistic gloss on the S&P action.

"I actually see a positive effect, because now everyone must be aware of how serious the situation is," he told Reuters. "This will help with the implementation of the proposals laid out by Chancellor Merkel and President Sarkozy to help stabilise the euro zone."

Jean-Claude Juncker, chairman of the 17 euro zone finance ministers, said he was "astonished" by S&P's announcement.

He described it as "a wild exaggeration and also unfair" and said it failed to take into account a new austerity plan for Italy, which pulled borrowing costs for the biggest of the euro zone's ailing countries back from the brink.

In Paris, Sarkozy's office said S&P had taken its decision last Tuesday, before both the Italian budget and the Franco-German plan for stricter budget rules.

U.S. Treasury Secretary Timothy Geithner arrived in Frankfurt to confer with several key European policymakers ahead of the summit on Thursday and Friday, a sign that Washington shares the view that the event will be a make-or-break moment for the global economy.

He will meet the leaders of Germany, France, Italy, Spain, the EU institutions and the European Central Bank to press for decisive action to arrest the crisis on his fourth trip to the troubled region since early September.

Sarkozy and Merkel's plan to force states to cut deficits would be accompanied by an early launch of a permanent bailout fund for euro states in distress.

That could provide the political cover that the European Central Bank needs to buy more bonds of ailing countries as a short-term stopgap, preventing countries from running out of money if they cannot sell bonds on the open market.