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Germany's original plan was to try to secure agreement among all 27 EU countries for a limited treaty change by the end of 2012, making it possible to impose much tighter budget controls over the 17 euro zone countries -- a way of shoring up the region's defenses against the debt crisis.

But in meetings with EU leaders in recent weeks, it has become clear to both German Chancellor Angela Merkel and French President Nicolas Sarkozy that it may not be possible to get all 27 countries on board, EU sources say.

Even if that were possible, it could take a year or more to secure the changes while market attacks on Italy, Spain and now France suggest bold measures are needed within weeks.

As a result, senior French and German civil servants have been exploring other ways of achieving the goal, one being an agreement among just the euro zone countries.

"The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that," German Finance Minister Wolfgang Schaeuble told ARD television on Sunday.

Another option being explored is a separate agreement outside the EU treaty that could involve a core of around 8-10 euro zone countries, officials say.

An even more pressing decision faces euro zone finance ministers when they meet on Tuesday.

Detailed operational rules for the euro zone's bailout fund, the European Financial Stability Facility (EFSF), are ready for approval, documents obtained by Reuters showed.

The approval of the rules will clear the way for the 440 billion euro facility to attract cash from private and public investors to its co-investment funds in coming weeks, which, depending on interest, could multiply the EFSF's resources.

With Germany rigidly opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of quickly calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.

Policymakers hope progress toward tougher fiscal rules will also assuage investors. Schaeuble said a Stability Union could be a decisive step to winning more confidence from the markets.

"That means that every euro zone member has to do its homework on its budget discipline. We want to ensure that through treaty changes," he said.

RADICAL OVERHAUL

Reuters exclusively reported on November 9 that French and German officials were discussing plans for a radical overhaul of the European Union to establish a more fiscally integrated and possibly smaller euro zone.

"The Germans have made up their minds. They want treaty change and they are doing everything they can to push for it as rapidly as possible," one senior EU official involved in the negotiations told Reuters. "Senior German officials are on the phone at all hours of the day to every European capital."

While Germany and France are convinced that moving toward fiscal union - which could pave the way for jointly issued euro zone bonds and may provide more leeway for the European Central Bank to act forcefully - is the only way to get on top of the debt crisis, some other euro zone countries are unable or unwilling to move so rapidly toward that goal.

Not only Greece, Ireland and Portugal, which are receiving EU/IMF aid, but also Italy and Spain and some east European countries such as Slovakia, would either find it difficult under current economic conditions to meet the budget constraints Germany wants, or simply do not agree with the aim.

Consequently, the French and German negotiators are exploring at least two models for more rapid integration among a limited number of euro zone countries, with the possibility of folding that agreement into the EU treaty at a later stage.

TWO MODELS

One is based on the Pruem Convention of 2005, also known as Schengen III, a treaty signed among 7 countries outside the EU treaty but which was open to any member state to join and was later acceded to by 5 more EU states plus Norway.

Another option would be to have a purely Franco-German mini-agreement along the lines of the Elysee treaty of 1963 that other euro zone countries could also sign up to, officials say.

"The options are being actively discussed as we speak and things are moving very, very quickly," a European Commission official briefed on the discussions told Reuters.

One source said the aim was to have the outline of an agreement set out before December 9, when EU leaders will meet for their final summit of the year in Brussels.

Sarkozy, who has made two speeches in the past two weeks highlighting the need for more rapid fiscal integration in the euro zone, and has acknowledged that it may be inevitable that a 'two-speed Europe' emerges, is due to make another keynote address on December 1 which could provide a platform for laying out in more detail the ideas that he and Merkel are developing.

A senior German government official denied there were any secret Franco-German negotiations, but emphasized that both countries saw the need for treaty change as pressing and were exploring how to achieve that in the best way possible.

"Germany and France are continuing to focus on proposals for a limited treaty change that can be presented at the EU summit in December," the official said, emphasizing that there was a need to act quickly to get changes in place.

The ECB has bought the bonds of euro zone strugglers in intermittent fashion when they have reached crisis point. Economists say it has to act much more radically to turn the market tide but the central bank, and Germany, has opposed any such move. Commitments to binding fiscal rules by euro zone governments may be the cover it needs to change tack.

"If this bond run is not stopped it will really endanger the stability of the European and even the global financial system. Bold action by the ECB is definitely needed," Peter Bofinger, one of the five "wise men" who formally advise the German government on the economy, told Irish state broadcaster RTE.

Reuters reported a similar possibility on Friday, with euro zone officials saying that if much tighter fiscal integration could be achieved among euro zone states, it would give the ECB more room to maneuver and buy sovereign bonds.

While EU officials are clear about the determination of France and Germany to push for more rapid euro zone integration, some caution that the idea of doing so with fewer than 17 countries via a sideline agreement may be more about applying pressure on the remainder to act.

By threatening that some countries could be left behind if they don't sign up to deeper integration, it may be impossible for a country to say no, fearing that doing so could leave it even more exposed to market pressures.

"Some of this is just part of the posturing you hear -- it's pressure from Germany to go for treaty change as quickly as possible," the official involved in the negotiations said.

"To some extent you have to see these ideas as part of the bargaining chips that are being put on the table."

(Reporting by Luke Baker, Julien Toyer in Brussels, Carmel Crimmins in Dublin, Matthias Sobolewski, Andreas Rinke, Erik Kirschbaum and Gernot Heller in Berlin, Writing by Luke Baker, editing by Mike Peacock)

The electronics retailer, which was one of the biggest losers in 2010, drew in shoppers by being one of the companies that opened its stores at midnight Thanksgiving night, and unlike in 2010, it focused more on having lower prices for big TVs and other popular items.

"Last year, they weren't as responsive with their pricing as they needed to be. We are seeing a different set of behaviors from them this time around," Lawrence Creatura, a portfolio manager at Federated Clover Investment Advisors, said.

Overall, shoppers will have spent a record $52.4 billion, up 16.4 percent from 2010, from Thursday through Sunday, according to a survey for the National Retail Federation, conducted by online research firm BIGresearch.

Many retailers opened at midnight or earlier on Thanksgiving, pulling in younger people who were willing to stay up late for deals on electronics and toys instead of getting up before dawn on Friday.

"Consumers have finite cash. If you can be the retailer who gets that cash first, you are likely to be more successful in the holiday selling season," Creatura said.

Aside from Best Buy, analysts and investors also named Macy's Inc and Wal-Mart Stores Inc among those that were strong starters.

"Best Buy's success is partially due to locking in compelling exclusive deals, better than Amazon's, and having unique in-store-only offers forcing the visit," Credit Suisse analyst Gary Balter said.

Lee Johnson, 46, shopping at a mall in El Segundo, California, bought a computer at Best Buy on Sunday.

He said online shopping is usually a better idea, but he needed the computer for an employee who is starting tomorrow.

"I just didn't have time."

Fifty million Americans visited online retail sites on Black Friday, representing an increase of 35 percent versus a year ago, and online retail sales in the United States on Black Friday jumped 26 percent this year, comScore data showed.

Each of the top five retail websites saw double-digit gains in visitors versus last year, led by Amazon.com. Wal-Mart ranked second, followed by Best Buy, Target and Apple, comScore said.

"Amazon.com once again led the pack, with 50 percent more visitors than any other retailer, while also showing the highest growth rate versus last year," comScore Chairman Gian Fulgoni said.

Amazon has used "every method at hand, old and new to promote their business this holiday season so far," WSL Strategic Retail CEO Wendy Liebmann said, referring to the online chains promotions in print, online and circulars.

About 122.9 million Americans plan to shop on Cyber Monday this year, up from the 106.9 million who shopped on Cyber Monday in 2010, NRF vice president Ellen Davis said on Sunday, citing a survey conducted by BIGresearch.

POTENTIAL LOSERS

Retailers that opened late or held the line on promotions failed to impress.

"Office supply seemed among the least busy as they opened later and had fewer high-profile deals than in years past," Balter said.

Retailers Gap Inc and Sears also "need to step up," Craig Johnson, president of consulting firm Customer Growth Partners said, adding that he worries the two chains may be too late already as the "horse is out of the barn."

"We would be most cautious on Sears due to their cash flow and serious appliance competition," Balter said.

The holiday shopping season that traditionally kicks off on Black Friday -- the biggest day of the year for retailers -- is closely watched by investors as consumer spending accounts for about 70 percent of the U.S. economy.

The National Retail Federation, an industry trade group, forecast a 2.8 percent increase in sales for the November-to-December holiday season, down from the 5.2 percent increase in 2010.

Despite the strong start, many remain skeptical if retailers will be able to maintain the sales momentum seen this weekend.

"One swallow does not a holiday season make. After the deepest recession in decades, the solid Black Friday weekend is welcome news, but we're only in the second quarter of a long playoff game," Johnson said.

(Reporting by Dhanya Skariachan in New York, Alistair Barr in San Francisco and Lisa Baertlein in Los Angeles; Editing by Brad Dorfman, Maureen Bavdek and Diane Craft)

(This version supercedes an earlier correction to fix the style for the spelling of comScore from ComScore. An earlier correction fixed the year and spelling of the National Retail Federation and BIGresearch in fourth paragraph. The errors were also in an earlier version of the story.)

China is slowing, Japan's exports are tumbling. Eastern European countries are wobbling as credit dries up from a pullback in lending by euro-zone banks.

In the United States, the improving economic picture has clouded somewhat after a mixed batch of economic data and downward revision to third-quarter growth to 2.0 percent doused some of the optimism for a strong fourth quarter. Consumer spending slowed in October and business investment weakened, showing a recovery that remains weak and vulnerable to shocks.

Against this uncertain backdrop, financial markets are volatile as European leaders fail to deliver any credible solutions to the sovereign debt crisis and U.S. lawmakers hit gridlock on slashing the budget deficit, further eroding business and consumer confidence and damaging growth prospects.

The U.S. labor market epitomizes these problems.

Two years into a recovery in which corporate profits are robust, hiring should be rebounding sharply. But U.S. employment numbers due on Friday are expected to show an economy treading water, with 120,000 new hires in November, up from 80,000 the prior month but way below the level needed to improve the outlook.

"The trend has been fairly stable over the last five months, stuck at a level just about strong enough to absorb new entrants into the labor force, but not to reduce the unemployment rate significantly," said Jeoff Hall, economist at IFR Markets, a Thomson Reuters company.

In fact, large U.S, companies are showing new caution.

Boeing Co announced plans last week to shutter a Kansas factory that employs 2,100 as it prepares for U.S. federal budget cuts that will hit defense spending hard. Bank of America began sending lay-off notices last week to technology staff as part of plans to cut 30,000 positions over the next few years, and Wells Fargo & Co also began job cuts.

Whirlpool Corp, the world's largest maker of household appliances, reports softening demand worldwide, including fast-growing emerging Asia and Latin America, and is cutting about 5,000 jobs in North America and Europe.

Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center, also is concerned that fiscal tightening in the United States -- from the roll-off of 2009 stimulus projects, cutbacks to city and state budgets and possible expiration of the payroll tax cut -- will further weaken the U.S. consumer, who accounts for the bulk of growth.

"Clearly Europe is in bad shape, and the global economic conditions are worsening too. If the U.S. consumer tires, the chances for recession are met," he said.

Since late September, the Levy Center has forecast that Europe's debt crisis will hit the United States through financial markets, its banks, weakened exports, lowered corporate profits and drag the United States into recession in 2012. Thiruvadanthai sees nothing to alter that picture.

EUROPEAN MIRE

European finance ministers meet again on Tuesday to review strengthening the region's bailout fund, seen only a month ago as the centerpiece for halting its debt crisis. But the sharp deterioration in euro-zone debt prices, which sucked in Germany last week in a failed bund auction, has undercut how much the fund can be leveraged, leaving investors highly skeptical that politicians can use it to stem contagion.

Italy issues 8 billion euros in longer term debt on Tuesday. Two-year Italian paper already is priced a 8 percent, one full point above the yield considered affordable by a nation with a stalled economy. Belgium, downgraded from AA-plus to AA by S&P on Friday, raises cash a day earlier, with the cost of insuring its debt having hit a record level.

Goldman Sachs warned on Friday that the public sector funding problems, which are hurting bank profits, are restricting household and corporate credit in Europe. This "could turn the moderate recession we are forecasting into something more akin to the 2008/09 experience."

Ripples from the slowdown are felt as far away as Brazil. Its central bank is expected to lower interest rates on Wednesday for third time since August, by a hefty 50 basis points, to 11 percent.

For the United States, recession remains a minority view, though forecasts are being revised downward for 2012. The Institute of International Finance, for instance, noted near-term resilience in its latest forecast but storm clouds ahead.

"Prospects are much less benign for early 2012, when the combination of a large fiscal contraction and rising spillovers from a recession in the euro area are likely to torpedo the U.S. economy," said Philip Suttle, IIF chief economist.

The ISM manufacturing index for the United States, due on Thursday, may show a slight improvement, to 51.5 in November from 50.8 in October, possibly reflecting inventory rebuilding after a tight third quarter. But grim PMI factory indices that showed worsening contractions in Europe and China last week cast some doubt on U.S. resiliency. Vehicle sales, also due on Thursday, are seen holding around the 13.3 million level, up slightly from the prior month.

From Europe, economic sentiment data due on Tuesday is likely to show further deterioration after financing problems worsened for Italy, Spain and even Germany over the past week. Fears of a sovereign ratings downgrade for France spread as its banking problems festered. Consumer sentiment is forecast to decline to minus 21 from minus 19.9 in October - which usually would portend further economic shrinkage ahead.

As long as European leaders delay in delivering a fiscal union that can rescue the common currency, financial markets will remain in the driving seat and the growth picture shaky.

"The world is struggling along, with downside risks from a bust-up of the euro-zone, or Greece, Italy and Spain leaving. It might be that Europe just runs out of time to fix its problems," said Paul Ashworth, economist at Capital Economics.

(Editing by Dan Grebler)

The New York Stock Exchange wants to give retail investors fractions of a penny in better prices when they trade securities listed there.

The plan, unveiled last month, would effectively set individuals apart from funds, brokers and other professionals - who would still pay the publicly displayed prices.

It is an effort to induce retail investors back from trading mostly off-exchange at electronic "wholesalers." And it means the Big Board is effectively taking on the handful of these wholesale market makers, such as Knight Capital Group Inc and hedge fund Citadel, that have been able to get a first look at retail orders and the opportunity to use that information to aid their own trading strategies.

If the NYSE wins regulatory approval for the plan, it could change the way many orders circulate, and it could mean slightly cheaper trading for Main Street investors.

But that approval isn't certain given the plan will resurrect a fierce philosophical debate over preferential treatment for some market participants. The U.S. Securities and Exchange Commission has only weeks to decide what to do.

"For the first time in a very broad stroke they could approve the ability of exchanges to discriminate by customer," said Christopher Nagy, managing director of order strategy at TD Ameritrade Holding Corp, the largest U.S. retail brokerage.

In a way, much of the commotion is because mom and pop aren't the savviest of stock traders.

Many casual traders don't even know that their orders rarely end up at the Big Board or Nasdaq. Instead, TD Ameritrade, E*Trade Financial Corp and other online brokers send the orders - up to 12 percent of all U.S. equity trading, according to Rosenblatt Securities -- to the wholesale market makers, who fill the orders and pay the broker a small fee for the privilege.

The wholesalers are willing to pay the small fee because mom and pop orders are seen as uninformed - or "dumb", to use the derogatory industry term. Unlike professional investors with sophisticated short-term strategies and quantitative market analysis, retail investors aren't usually in a position to keep on top of news, rumors or the flow of orders and liquidity, and may sometimes buy or sell based on a hunch.

The diversion of these orders to wholesalers is quite legal, and said to give retail investors about a tenth of a penny in better prices, on average, than they would otherwise get on the exchanges. It is also one of the main reasons more than 30 percent of U.S. equity trading takes place off-exchange in the anonymous "dark", up from about 20 percent in 2007.

The payment-for-order-flow by wholesalers and online brokers has frustrated NYSE Euronext and Nasdaq OMX Group Inc, which have seen their market share dwindle over the past decade. NYSE Euronext now has only 35 percent of trading in NYSE-listed stocks, down from 80 percent in 2005.

The SEC, meanwhile, has been increasingly uncomfortable with the growing share of dark trading as it is more difficult to regulate.

"The vast majority of retail traders don't know that when they're trading NYSE stocks, they're not actually trading at the NYSE," said market structure author and expert Larry Harris, a finance professor at University of Southern California's Marshall School of Business.

"The NYSE's proposal is designed to try to recapture some of that retail order flow."

GAME PLAN

The NYSE plan, which is called the Retail Liquidity Program, was proposed last month after consultation with the SEC. It is the latest in a long line of attempts by U.S. exchanges to win back retail investors.

If exchanges can attract more "dumb" orders to their market, they'll also attract more institutions and high-frequency trading firms eager to trade against those orders - which is potentially lucrative trading volume.

But getting the green light will take work.

There is some tough opposition to NYSE's plan, interviews with wholesale groups and other industry players shows. Overall, though, there is an expectation the SEC will approve an adjusted version of the plan that would give retail investors some sort of exemption for better exchange pricing.

Nasdaq as well as Direct Edge, a private exchange operator that handles 10 percent of U.S. equity trading, are expected to propose similar retail-pricing proposals, according to industry sources familiar with the plans. BATS, another private exchange, is expected to criticize parts of NYSE's plan, said the sources, who requested anonymity.

The three exchanges declined to comment. The SEC declined an interview, citing the ongoing public comment period.

A raft of letters reacting to the NYSE is expected from brokerages, exchanges and others before the November 30 public comment deadline. The SEC, under Chairman Mary Schapiro, then has until December 16 to decide whether to back the plan or take more time to mull it over, based on the comments.

"I would be quite surprised if the SEC were to approve this as is," said Jamie Selway, managing director and head of liquidity management at Investment Technology Group Inc. "People have played footsie with this issue of price discrimination ... but this would be a big step for the SEC."

In detail, here is what the NYSE wants to do:

For a one-year pilot, NYSE would create two new classes of market participants: companies such as E*Trade, Charles Schwab Corp or even wholesale firms that are qualified to send bona fide retail orders to the exchange; the second is market makers that are required to provide "potential price improvement" to the orders in an anonymous, or dark, fashion.

Retail investors would get at least a tenth of a penny in better prices than the best displayed bid or offer at that moment. The NYSE has not yet said how much it will rebate brokers that send the orders, nor how much it will charge firms that provide the liquidity.

It all adds up to a challenge to Knight, Citadel, UBS AG, Citigroup Inc and E*Trade's market making arm, which are the dominant U.S. retail wholesalers. It could also hurt "dark pool" venues, some run by banks such as Credit Suisse Group AG, where stocks are traded anonymously.

TOUGH OPPOSITION

The NYSE proposal effectively gives some people in the market preferential treatment over others. This is not allowed at exchanges, though some argue that wholesalers and those running dark pools already offer it.

Exchange rules are "not designed to permit unfair discrimination between customers, issuers, brokers, or dealers..." the U.S. Securities Exchange Act says.

"My broader concern," said one brokerage official, "is that the fair access provisions that the exchanges have to abide by are significantly weakened by this."

Joseph Mecane, NYSE Euronext's co-head of U.S. listings and cash execution, acknowledged he is challenging fair access provisions, but only to an extent. "What we're essentially arguing is, by making this program only available to retail customers, we're not unreasonably discriminating against any class," he said.

The SEC would also have to grant the NYSE an exemption to a rule that limits the pricing of stocks to no finer than penny increments -- that is, General Electric Co's shares can only trade hands at $15.08, not $15.085 or $15.0852.

In the end, the regulator will have to decide whether NYSE's plan will bring enough benefit to individual traders and to the public markets to outweigh all the concerns over fairness, and the complaints that it will only complicate an already complicated marketplace.

(Reporting by Jonathan Spicer. Editing by Martin Howell)

The electronics retailer, which was one of the biggest losers in 2010, drew in shoppers by being one of the companies that opened its stores at midnight Thanksgiving night, and unlike in 2010, it focused more on having lower prices for big TVs and other popular items.

"Last year, they weren't as responsive with their pricing as they needed to be. We are seeing a different set of behaviors from them this time around," Lawrence Creatura, a portfolio manager at Federated Clover Investment Advisors, said.

Overall, shoppers will have spent a record $52.4 billion, up 16.4 percent from 2011, from Thursday through Sunday, according to a survey for the National retail Federation, conducted by online research firm BIGreasearch.

Many retailers opened at midnight or earlier on Thanksgiving, pulling in younger people who were willing to stay up late for deals on electronics and toys instead of getting up before dawn on Friday.

"Consumers have finite cash. If you can be the retailer who gets that cash first, you are likely to be more successful in the holiday selling season," Creatura said.

Aside from Best Buy, analysts and investors also named Macy's Inc (M.N) and Wal-Mart Stores Inc (WMT.N) among those that were strong starters.

"Best Buy's success is partially due to locking in compelling exclusive deals, better than Amazon's (AMZN.O) and having unique in-store-only offers forcing the visit," Credit Suisse analyst Gary Balter said.

On the flip side, retailers that opened late or held the line on promotions failed to impress.

"Office supply seemed among the least busy as they opened later and had fewer high-profile deals than in years past," Balter said.

Retailers Gap Inc (GPS.N) and Sears (SHLD.O) also "need to step up," Craig Johnson, president of consulting firm Customer Growth Partners said, adding that he worries the two chains may be too late already as the "horse is out of the barn."

"We would be most cautious on Sears due to their cash flow and serious appliance competition," Balter said

The holiday shopping season that traditionally kicks off on Black Friday -- the biggest day of the year for retailers -- is closely watched by investors as consumer spending accounts for about 70 percent of the U.S. economy.

The National Retail Federation, an industry trade group, forecast a 2.8 percent increase in sales for the November-to-December holiday season, down from the 5.2 percent increase in 2010.

Despite the strong start, many remain skeptical if retailers will be able to maintain the sales momentum seen this weekend.

"One swallow does not a holiday season make. After the deepest recession in decades, the solid Black Friday weekend is welcome news, but we're only in the second quarter of a long playoff game," Johnson said.

(Reporting by Dhanya Skariachan; Editing by Brad Dorfman and Maureen Bavdek)

Germany's original plan was to try to secure agreement among all 27 EU countries for a limited change to the Lisbon Treaty by the end of 2012, making it possible to impose much tighter budget controls over the 17 euro zone countries -- a way of shoring up the region's defenses against the debt crisis.

But in meetings with EU leaders in recent weeks, it has become clear to both German Chancellor Angela Merkel and French President Nicolas Sarkozy that it may not be possible to get all 27 countries on board, EU sources say.

Even if that were possible, it could take a year or more to finally secure the changes while market attacks on Italy, Spain and now France suggest bold measures are needed within weeks.

As a result, senior French and German civil servants have been exploring other ways of achieving the goal, either via an agreement among just the euro zone countries, or a separate agreement outside the EU treaty that could involve a core of around 8-10 euro zone countries, officials say.

No firm decisions have yet been reached.

Reuters exclusively reported on November 9 that French and German officials were discussing plans for a radical overhaul of the European Union to establish a more fiscally integrated and possibly smaller euro zone.

"The Germans have made up their minds. They want treaty change and they are doing everything they can to push for it as rapidly as possible," one senior EU official involved in the negotiations told Reuters. "Senior German officials are on the phone at all hours of the day to every European capital."

While Germany and France are convinced that moving toward fiscal union - which could pave the way for jointly issued euro zone bonds and may provide more leeway for the European Central Bank to act forcefully - is the only way to get on top of the debt crisis, some other euro zone countries are unable or unwilling to move so rapidly toward that goal.

Not only Greece, Ireland and Portugal, which are receiving EU/IMF aid, but also Italy and Spain and some east European countries such as Slovakia, would either find it difficult under current economic conditions to meet the budget constraints Germany wants, or simply do not agree with the aim.

Consequently, the French and German negotiators are exploring at least two models for more rapid integration among a limited number of euro zone countries, with the possibility of folding that agreement into the EU treaty at a later stage.

TWO MODELS

One is based on the Pruem Convention of 2005, also known as Schengen III, a treaty signed among 7 countries outside the EU treaty but which was open to any member state to join and was later acceded to by 5 more EU states plus Norway.

Another option would be to have a purely Franco-German mini-agreement along the lines of the Elysee treaty of 1963 that other euro zone countries could also sign up to, officials say.

"The options are being actively discussed as we speak and things are moving very, very quickly," a European Commission official briefed on the discussions told Reuters.

One source said the aim was to have the outline of an agreement set out before December 9, when EU leaders will meet for their final summit of the year in Brussels.

Herman Van Rompuy, the president of the European Council, which represents EU member states, is supposed to deliver a preliminary report on treaty change at the summit. He has held extensive talks with EU leaders in recent weeks to gauge the feasibility of bringing about rapid treaty changes.

Sarkozy, who has made two speeches in the past two weeks highlighting the need for more rapid fiscal integration in the euro zone, and has acknowledged that it may be inevitable that a 'two-speed Europe' emerges, is due to make another keynote address on December 1 which could provide a platform for laying out in more detail the ideas that he and Merkel are developing.

A senior German government official denied there were any secret Franco-German negotiations, but emphasized that both countries saw the need for treaty change as pressing and were exploring how to achieve that in the best way possible.

"Germany and France are continuing to focus on proposals for a limited treaty change that can be presented at the EU summit in December," the official said, emphasizing that there was a need to act quickly to get changes in place.

Germany's Welt am Sonntag newspaper reported on Sunday that Merkel and Sarkozy were working on a new Stability Pact, setting out national debt limits, that could be signed up to by a number of euro zone countries and which would allow the ECB to act more decisively in the crisis.

"If the politicians can agree to a comprehensive step, the ECB will jump in and help," the paper quoted a central banker as saying.

The ECB has bought the bonds of euro zone strugglers in intermittent fashion when they have reached crisis point. Economists say it has to act much more radically to turn the market tide but the central bank, and Germany, has opposed any such move. Commitments to binding fiscal rules by euro zone governments may be the cover it needs to change tack.

"It would be a real disaster if this strategy which is in fact no strategy, this muddling through, were to continue for some months," Peter Bofinger, one of the five "wise men" who formally advise the German government on the economy, told Irish state broadcaster RTE.

"If this bond run is not stopped it will really endanger the stability of the European and even the global financial system. Bold action by the ECB is definitely needed."

Reuters reported a similar possibility on Friday, with euro zone officials saying that if much tighter fiscal integration could be achieved among euro zone states, it would give the ECB more room to maneuver and buy sovereign bonds.

BARGAINING PLOY?

While EU officials are clear about the determination of France and Germany to push for more rapid euro zone integration, some caution that the idea of doing so with fewer than 17 countries via a sideline agreement may be more about applying pressure on the remainder to act.

By threatening that some countries could be left behind if they don't sign up to deeper integration, it may be impossible for a country to say no, fearing that doing so could leave it even more exposed to market pressures.

"Some of this is just part of the posturing you hear -- it's pressure from Germany to go for treaty change as quickly as possible," the official involved in the negotiations said.

"To some extent you have to see these ideas as part of the bargaining chips that are being put on the table."

The risk for Merkel and Sarkozy is that if they do ultimately decide to push for a sideline agreement involving only 8-10 euro zone states, it would send a clear signal to the markets that the euro zone is split and that some countries are not seen as full members of the currency union.

That could either mean that some countries in the euro zone are left with fewer voting rights, even if they still use the euro, or it could mean that some countries decide, ultimately, that they would be better off without the euro -- a camp that officials say Greece, the crucible of the debt crisis, could fall into.

(Reporting by Luke Baker, Julien Toyer in Brussels, Carmel Crimmins in Dublin and Andreas Rinke and Gernot Heller in Berlin; Writing by Luke Baker, editing by Mike Peacock)

Echoing a Reuters report on Friday from Brussels, the Sunday newspaper said the French and German leaders were prepared to back a deal with other euro countries that might induce the ECB to intervene more forcefully to calm the euro debt crisis.

The newspaper report quoted German government sources as saying that the crisis fighting plan could possibly be announced by German Chancellor Angela Merkel and French President Nicolas Sarkozy in the coming week.

In an advance release before publication, Welt am Sonntag said that because it would take too long to change existing European Union treaties, euro zone countries should just agree among themselves on a new Stability Pact to enforce budget discipline - possibly implemented at the start of 2012.

It could be similar to the Schengen Agreement which applies to EU countries that choose to take part and enables their citizens to enjoy uninhibited cross border travel. Among the countries in the Stability Pact, there would be a treaty spelling out strict deficit rules and control rights for national budgets.

The European Central Bank should also emerge more as a crisis fighter in the euro zone, Welt am Sonntag wrote, saying that while governments cannot tell the independent ECB what to do, the expectations are clear.

"Based upon these measures, there should be a majority within the ECB for a stronger intervention in capital markets," Welt am Sonntag said. It quotes a central banker as saying: "If the politicians can agree to a comprehensive step, the ECB will jump in and help."

The ECB, which cannot directly finance governments, has been buying Italian and Spanish bonds on the open market since August to try to keep down borrowing costs for the euro zone's third and fourth largest economies.

Yields on Italian and Spanish debt have nonetheless climbed in recent weeks, despite the ECB intervention and the appointment of a new technocrat government in Rome and the election of the conservative Popular Party in Madrid.

In Brussels on Friday, euro zone officials said a push by euro zone countries toward very close fiscal integration could give the ECB the necessary room for maneuver to scale up euro zone bond purchases and stabilize markets.

France's Journal du Dimanche newspaper said reforms to Europe's economic governance would be the focus of a speech which Sarkozy will deliver in the Mediterranean port of Toulon on Thursday.

"The European Commission could take on supra-national powers," said one French presidency source, according to the newspaper, saying that Brussels would supervise the decisions of countries at risk of default, provided they request this.

"National parliaments will retain the initiative over the (policy) efforts to be made," one French negotiator told the paper.

The European Commission, the EU executive arm, put forward proposals on Wednesday to grant it intrusive powers of approval of euro zone budgets before they are submitted to national parliaments, which, if approved, would effectively mean ceding some national sovereignty over budgets.

Berlin, meanwhile, is pushing to change the European Union treaty so that a country could be sued for breach of EU budget rules in the European Court of Justice.

Le Figaro said there was resistance within Sarkozy's government to allowing France's budgets to be submitted for scrutiny by an "intergovernmental conference" in Brussels, but the president would seek to rally support for this.

A closer fiscal union could eventually pave the way for joint debt issuance for the euro zone, where countries would be liable for each others' debts.

Germany strongly opposes the joint issuance idea fearing spendthrift countries would piggyback on its low borrowing costs - meaning no gain for the virtuous and no pain for the sinners.

(Additional reporting by Jan Strupczewski in Brussels and Daniel Flynn in Paris; writing by Erik Kirschbaum; editing by Elizabeth Piper/Ruth Pitchford)