European finance ministers prepared on Monday to discuss tighter regulation on hedge funds a week after launching a $1 trillion debt rescue plan, as the euro was hit by fears austerity measures would stifle recovery.   

Before the euro zone ministers' talks, also expected to cover curbs on private equity, Germany said it was drawing up plans to boost the euro and avert future debt crises.

Among other proposals for reform, a European Central Bank policymaker proposed an independent body should be able to punish euro zone countries who went too far into the red.

The euro slumped to a four-year low on Monday on Asian markets after Friday's sell-off in the West, falling to its lowest since April 2006 on $1.2234. It later recovered to $1.235 although analysts remained bearish.   

"The euro is caught between a rock and a hard place at the moment," said Howard Archer, chief UK and European economist at IHS Global Insight, predicting a further drop towards $1.15 over coming weeks.

Bank shares in Greece, whose debt crisis prompted the rescue package aimed at stopping a spread to other vulnerable euro zone members and even destabilising the global economy, tumbled four percent on Monday.

Prime Minister George Papandreou was quoted as saying French and German leaders backed a possible ban on so-called credit default swaps blamed for increasing borrowing costs for vulnerable countries like Greece.

He said he had written to US President Barack Obama jointly with German Chancellor Angela Merkel, French President Nicolas Sarkozy and Eurogroup chairman Jean-Claude Juncker on whether the credit default swaps market should be closed.

In an interview with Germany's Handelsblatt newspaper,  Papandreou criticised financial markets for overreacting to Greek's debt crisis and accused speculators of helping to provoke panic reactions.

"Angela Merkel, Nicolas Sarkozy, Jean-Claude Juncker and I have suggested in a joint letter to Barack Obama whether the markets for credit default swaps ... should not be closed. The G20 countries want to discuss this," he said.

Politicians have long called for tighter control of speculators, who they believe exacerbated Greece's borrowing problems. But Papandreou's call to consider closing the market for this insurance appeared to go further than anything demanded so far and would probably meet stiff opposition from companies and other bond buyers who depend on it to cover their risk.

European Central Bank council member Ewald Nowotny said that while the CDS market needed reform, there was no need to close it down.

In action to back up the European rescue package, the European Central Bank bought 16.5 billion euros worth of bonds in the first week of its government debt buying program and will offset the purchases by taking one-week deposits from banks. - Reuters