FRANKFURT: The European Central Bank took centre stage in the battle to save the euro on Thursday after new ratings warnings to EU leaders to agree budget discipline at a summit beginning later. The ECB's policy council gathered in Frankfurt just hours before European Union leaders flew to Brussels in what is widely seen as the last chance to prevent the eurozone from breaking up and threatening the entire EU. Fragmentation of the eurozone would send violent shock waves reverberating through the global economy. The ECB is widely expected to cut its key interest rate in view of a looming economic downturn, and markets were nervously waiting to see what other action the central bank -- which many see as the only body able to contain the crisis -- would take. The central question being asked by investors is will the ECB consider that new commitments by Germany and France to tighten up eurozone budget discipline are sufficiently convincing to give the ECB extra room for manoeuvre. The announcement by international credit rating agency Standard & Poor's that it is placing entire 27-nation bloc on downgrade watch, just days after similar moves for eurozone countries and their EFSF bailout fund, has turned up the pressure to breaking point. "The situation is serious... the euro can explode and Europe unravel", France's minister for European affairs Jean Leonetti told France's Canal Plus television. The ECB has played fire-fighter to a substantial extent throughout the long and debilitating crisis. But its officials, including its new chief Mario Draghi, insist that such a role is only temporary and it is ultimately up to governments to get their finances in order. There is widespread pressure for the ECB to solve the crisis by simply printing enough money to buy up a large part of the mountain of debt that many eurozone countries have amassed. But the bank, strongly backed by Germany, is vehemently opposed to this, which it argues runs against the very rules that the eurozone, and the wider EU, is built on. Among the so-called "unconventional" measures" the ECB has taken so far to contain the crisis, the central bank has been keeping the region's banks flush with liquidity or cash. It has also, albeit reluctantly, been buying up the sovereign bonds of countries finding it difficult to drum up financing the usual way via the markets. Crucially, in comments to the European Parliament last week, ECB chief Draghi signalled flexibility to go beyond those measures, but only if governments credibly removed the threat of moral hazard, meaning obtaining a free ride, for non-compliant countries. Analysts were sceptical, however, whether the ECB would deliver so shortly before the EU summit. "Hints from ECB president Draghi in this regard are unlikely just hours before the EU government leaders commence the crucial summit. But watch out for signals from the ECB over the weekend if tighter fiscal rules were to be agreed," said Commerzbank analyst Rainer Guntermann. The summit itself looks set to be the toughest yet, with Germany playing down hopes that it will save the euro and French President Nicolas Sarkozy warning the risk of a eurozone "explosion" was still very real. For high-ranking officials and diplomats, the two biggest obstacles are Germany's refusal to embark on anything short of treaty change agreed under the full glare of lengthy, costly and risky public consultation, but that its government considers legally-secure. At the same time, Britain refuses to back changes Berlin wants all EU states to agree to, unless it secures important quid pro quos such as ring-fencing the all-important City of London financial services sector from future EU regulation including a proposed tax. The situation is veering from serious towards desperate, so much so that US President Barack Obama held urgent telephone talks late on Wednesday with German Chancellor Angela Merkel. Already, Obama had despatched his treasury secretary Timothy Geithner to Europe for talks with key players that will continue on Thursday in Marseille, France, where EU conservative allies are meeting for pre-summit negotiating strategy talks. Merkel, along with French President Nicolas Sarkozy and ECB chief Draghi, plus three other senior eurozone figures, will stage their own negotiating huddle ahead of the Brussels summit starting at 7:30 pm (1830 GMT). They hope to conclude a grand bargain that can take intense pressure off those countries most at risk of needing bailed out -- Italy and Spain.

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