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The falling value of banks' holdings of government debt from Greece and other euro zone periphery states has already provoked the implosion of Belgian lender Dexia, adding urgency to the Merkel-Sarkozy talks.

"There is a high risk that this crisis further escalates and broadens," German Finance Minister Wolfgang Schaeuble told German paper Frankfurter Allgemeine Sonntagszeitung in an interview released in advance of publication on Sunday.

Germany and France have so far been split over how to strengthen shaky lenders and fight financial market contagion that may follow a possible Greek default.

Paris is keen to tap the euro zone's 400 billion rescue fund, the EFSF, to recapitalize its own banks, while Berlin is insisting the fund should be used as a last resort.

The International Monetary Fund (IMF) has said European banks need 200 billion euros in additional funds.

Irish Finance Minister Michael Noonan said the capital needed to bolster banks' cushions was likely to come from a variety of sources but the total bill would be large.

"I think there is general agreement that it will be significantly in excess of 100 billion (euros)," Noonan told reporters on the sidelines of an economic forum in Dublin.

"I know that some of the big German banks that I was talking to personally intend raising money on the market so it will be private funding. Other banks would like to avail of the EFSF fund. Other banks will rely on their sovereign governments to provide the capital so there is going to be a range of ways of doing it," he said.

Regulators worry that forcing a raft of major lenders to take state aid would not be the best use of Europe's limited capital resources, while banks fear than singling out only some lenders for extra support could heighten market worries about weaknesses at individual banks.

German newspaper Frankfurter Allgemeine Zeitung on Saturday cited financial sources as saying France's five-biggest lenders would agree to take 10-15 billion euros in funding from the state but also wanted to see Germany's No. 1 lender Deutsche Bank plump its capital cushion.

But a senior French banking source shot down the idea that French banks could be pushing for state aid, saying the Frankfurter Allgemeine Zeitung report was baseless.

"I don't know what game the Germans are playing... This is wishful thinking," the source told Reuters, asking not to be named.

Deutsche Bank Chief Executive Josef Ackermann is against any role for the state in his own bank's capital position and has ruled out a capital increase.

A Deutsche Bank spokesman on Saturday referred to Ackermann's long-standing public position and declined further comment.

The chief financial officer of Deutsche Bank unit, Deutsche Postbank, said he expected the 21 percent haircut on Greek bonds that international banks agreed to take as part of a EU-brokered debt relief deal in July would not be enough.

"Therefore we would expect renewed writedowns in the third quarter," Postbank's Marc Hess told Boersen-Zeitung newspaper.

Banks' need to gird their capital bases is also leading some to merge, such as Spain's No. 5 retail bank Banco Popular, which launched an all-share bid for its smaller rival Banco Pastor on Friday.

FIGHTING FIRES

Sarkozy is due to arrive in Berlin on Sunday afternoon and hold a working dinner with Merkel in the evening, amid signs that conditions for resolving the crisis are getting no easier.

Slovakia's coalition government was in deadlock on Saturday over talks on ratifying a strengthening of the EFSF rescue fund, with a junior party insisting on conditions for its support.

Euro zone minnows Slovakia and Malta are the last countries holding up expansion of the EFSF mandate, which is needed to fight the sovereign debt crisis [ID:nL5E7L806G]

Angry Greeks have taken to the streets to protest government efforts to slash spending, boost taxes and privatize state companies but Belgian Finance Minister Didier Reynders said the pain could not go on indefinitely.

"This is not acceptable on a political, social or even economic level: we do not want the cure to kill Greece," Reynders told Greek newspaper Proto Thema in an interview.

Meanwhile, Greece's representative at the IMF said the country's borrowing needs will be higher than currently projected due to a tougher-than-expected recession and the outcome of a debt agreement with private sector creditors.

"This financing gap will have to be covered either by increasing the 109 billion euro loan agreed on July 21 or through a restructuring of private debt," Panagiotis Roumeliotis said in an interview in financial daily Imerisia.

EU leaders agreed in July to provide Greece with a second bailout of more than 109 billion euros to help the country service its debt through to 2020. ($1 = 0.741 Euros)

(Reporting by Jonathan Gould, Sarah Marsh, Carmel Crimmins, Lorraine Turner, Christian Plumb, Philip Blenkinsop, Andreas Rinke and Harry Papachristou; Editing by Alison Birrane)

But will third-quarter results be enough to drive the S&P 500 higher? Or will Europe's woes get in the way?

The unofficial start of earnings season begins on Tuesday, when Dow component Alcoa Inc reports third-quarter results after the close of trading.

The earnings and guidance that may follow could give investors some clues on the health of the global economy, including any impact the euro-zone debt crisis has had and might continue to have on profits.

But even if earnings paint a rosier picture than anticipated, stocks may face a stiff test in climbing much further, as analysts pointed to the declining 50-day moving average as a key resistance point that could limit gains. That level now sits around 1,178.

This week's sharp gains were built on improved hopes that European officials will get a handle on the euro-zone debt crisis. That fed a massive bout of short-covering as those betting against stocks were forced to buy shares to avoid losing money.

The benchmark S&P 500 index rose 2.1 percent for the week, buoyed by a 6 percent jump mid-week, as it appeared plans in the euro zone to get a grip on the debt crisis were moving forward. The region remains a wild card, which could cause any gains to quickly vanish.

"For the next three weeks, in this country, earnings will be the focus and the subplot is going to be Europe -- Europe is always going to be just under the surface," said Ken Polcari, managing director at ICAP Equities in New York.

"But if all of a sudden in the middle of next week, some catastrophe happens in Europe, the focus is immediately going to be headline driven and goes back to Europe."

Other companies expected to post quarterly results next week include PepsiCo Inc, tech giant Google Inc, JPMorgan Chase & Co and toy maker Mattel Inc.

KEEPING THE BAR LOW

Clouding the picture for profits is the fact that many earnings estimates have been trimmed by analysts in light of the turmoil in Europe, a staggering global economy and other events which resulted in a more cautious forecast.

"You've got to remember what was going on in July with the debt-ceiling crisis, credit default -- companies were not willing to go out on a limb and make any big expectations," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

"So they were conservative going in, and we have not seen a whole lot of downward revisions, which suggests companies are probably going to be able to make those numbers."

The economic calendar for next week includes the FOMC minutes from the two-day meeting in late September, along with import prices and retail sales for September, in addition to the preliminary reading on October consumer sentiment from the Thomson Reuters/University of Michigan surveys.

Economic data of late has been better than expected, helping to quell fears that the economy was headed for a double-dip recession. Once again, that leaves the euro-zone crisis as a potential land mine to disrupt a slow move higher.

"The reason we have lifted in the past week is the rhetoric has improved and we are seeing progress, not necessarily a plan, but you are getting countries to admit to the problem, and that is a step in the right direction -- you have to seek help before you can get help," Pado said.

"That is all we really need in order to get beyond this, and start focusing on the future and focusing on our own data. We have plenty of data that suggests slow growth, but nothing that suggests waving the red flag like a crazy person saying, 'How can you not see this?'"

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)

* Economists forecast a total of 60,000 jobs were created in September, compared with no new jobs in August. Some tentative signs of improvement in recent economic numbers have helped calm fears the global economy was slipping back into recession.

* "The market is on hold obviously waiting for the unemployment number," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "Any surprises above and beyond market expectations, then the market might respond to that."

* The Labor Department release its non-farm payrolls report at 8:30 EDT. The unemployment rate is seen unchanged at 9.1 percent.

* S&P 500 futures were down 4 points and below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 20 points, and Nasdaq 100 futures lost 3 points.

* Cardillo said investors would also be firmly focused on Europe. Optimism the region was on track in resolving its sovereign debt crisis helped drive a 6 percent rally in the S&P 500 over the last three sessions.

* "It's is all about the employment data and hopes for more good news from Europe over the weekend," Cardillo said.

* Investors have been focused on weakness in Europe's banking system. Credit agency Moody's cut its ratings on British banks Lloyds Banking Group Plc (LLOY.L) and Royal Bank of Scotland Group Plc (RBS.L) on Friday and said it expected the U.K. government would have to continue to support the country's systemically important banks.

* Early Friday, the FTSEurofirst 300 .FTEU3 index of top European shares was little changed after two days of sharp gains. The European Central Bank offered on Thursday to help struggling banks. Japan's Nikkei average .N225 closed up 1 percent.

* The Bank of Japan kept monetary policy unchanged on Friday, holding off from tapping its depleted policy arsenal for now although fears of a global recession and Europe's debt crisis were clouding the outlook for the fragile economy.

* From a technical perspective, the S&P 500 remains in a downtrend. The index has been trapped in a range in the past few months, deteriorating into lower lows. The index's wide range is seen from about 1,100 to 1,250.

* The Commerce Department releases wholesale inventories for August at 10 a.m. EDT. Economists predicted inventories to rise 0.5 percent versus a 0.8 percent increase in July.

(Editing by Jeffrey Benkoe)

But while the tone of the government's closely followed employment report on Friday is expected to be soft, economists said it still should not be viewed as flagging a new downturn in the world's largest economy.

U.S. nonfarm payrolls probably increased 60,000 last month after holding steady in August, according to a Reuters survey. August was the first month in a year that the ailing economy failed to create jobs.

But much of September's relative strength will reflect the return of 45,000 Verizon Communications workers who had dropped off payrolls in August due to a strike. Excluding those workers, payrolls probably only increased by 15,000 for the month.

Private employment is expected to have increased 100,000 last month, an acceleration from August's paltry 17,000 count. But an 11th straight month of declines in government payrolls is expected.

The report will provide critical evidence of whether "the economy is stalling in response to heightened economic uncertainty and financial market volatility," said Carl Riccadonna, a senior U.S. economist at Deutsche Bank in New York. "We do not expect this to be the case."

The nation's weak labor market has posed a critical challenge for President Barack Obama, who is gearing up for a tough reelection battle in November 2012. Obama on Thursday used a news conference to press for measures to spur jobs growth that face uncertain prospects in Congress.

Recent reports on manufacturing, business spending and auto sales suggest the economy fared better in the third quarter after growing at an anemic 1.3 percent annual pace in the April-June period.

But some economists are warning Europe's debt crisis threatens to all but derail the U.S. recovery.

And while third-quarter growth is expected to top a 2 percent annualized pace, that is still too slow to make a dent in the high unemployment rate, which is expected to have held steady at 9.1 percent in September.

The economy needs to grow by at least a 2.5 percent rate, with payrolls expanding by 150,000 positions a month, to keep the jobless rate from rising.

JOBS ELUDE RECOVERY

Signs of growing labor market distress could pile pressure on the Federal Reserve and the Obama administration for more measures to put the 14 million jobless Americans back to work.

The U.S. central bank last month announced new steps to stimulate the economy by pushing long-term borrowing costs even lower by shifting assets on its balance sheet.

"Since the beginning of the year, employment growth has slowed by close on 80 percent. There is little hope of an improvement in the coming months," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Uncertainty over the economic outlook, which continues to be muddied by acrimony in Washington over budget policy and by Europe's inability to get to grips with its debt crisis, is making businesses reluctant to hire.

While the employment report will likely be weak, a few bright spots are expected. Hourly earnings are seen rebounding 0.2 percent after falling 0.1 percent in August.

An improvement in income is crucial for consumer spending, which accounts for about 70 percent of U.S. economic activity.

"We're seeing consumers dipping into their savings to finance consumption. That is a little bit concerning given that equity prices are falling and house prices are flat to down," said Moody's Analytics' Sweet.

"Consumers could become refocused on building their nest egg cushion rather than spending."

Incomes dropped in August for the first time since October 2009, curbing spending and pushing savings to the lowest level in more than 1-1/2 years.

Manufacturing could provide another source of optimism, with employment in the sector expected to have risen after slipping in August. Manufacturing remains the main pillar of the economy, even though it accounts for only about 12 percent of gross domestic product.

Health care is expected to show another month of job gains. The sector has consistently added jobs as the baby boomers demand more health care services.

(Reporting by Lucia Mutikani; Editing by Leslie Adler)