EU finance ministers agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests as a report said a 'systemic' crisis in sovereign debt now threatened a new credit crunch.

'We reached the conclusion that we need to make our financial system more robust,' Spanish Economy Minister Elena Salgado told reporters after a meeting of EU finance ministers in the south-western Polish city of Wroclaw.

'There is a consensus that it would be good for our financial institutions to strengthen their capital to comply with Basel III requirements and to face any eventuality of the moment,' she said.

However, the agreement does not mean European banks are likely to get large, additional capital injections from public coffers -- it is more an acknowledgement of the results of the European bank stress tests in July.

The tests showed a financing gap for banks of only 6 billion euros ($8 billion) -- a sum many investors believe could be much higher if the debt crisis worsens.

European banks are therefore struggling to borrow amid growing alarm among US money market funds, and other traditional dollar lenders, about the effect of a feared Greek debt default on European banks' books.

Persistent jitters over French banks' exposure to Italy and Greece hammered the shares of BNP Paribas and Credit Agricole .

On Wednesday, Moody's Investors Service downgraded Credit Agricole and Societe Generale , citing increased concerns about their funding and liquidity profiles in light of worsening refinancing conditions. It left the ratings of the biggest French bank BNP on review for downgrade.

'From our perspective, we see a clear need for bank recapitalisation,' Swedish Finance minister Anders Borg told reporters on leaving the meeting of finance ministers.

'I think the IMF has spelled it out very clearly. The EU banking system needs better backstops and that's basically a matter of capital,' he said.

A document prepared for the ministers' meeting said banks should raise their capital.

Guidelines for the stress tests stipulate banks should announce measures to boost capital, if needed, within 3 months of the results and carry out the increase, preferably financed by private investors, within 6 months.

'Despite the increased resilience of European banks and the limited remaining refinancing needs for the rest of 2011, in view of a compelling market pressure for an increase in banking capital benchmarks and with the aim of dispelling any doubts on the intrinsic stability of most banks, a further reinforcement of bank resources is advisable at this juncture,' it said.

'This is important for banks that have failed the stress test, but also for those that have passed the test but with capital level close to the relevant threshold, and particularly with sizeable exposures to sovereigns under stress,' it said.

Central banks around the world announced on Thursday they would work together to offer extra loans in U.S. dollars to banks, a move designed to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis.

'We noted the fact that unlimited liquidity windows are opened,' Salgado said. '(But) they're short term and this situation is not optimal,' she said.

Some ministers sought to play down the banks' troubles.

'The overall situation of European banks is stable,' said the head of the euro zone finance ministers' group, Jean-Claude Juncker.

'All the instruments are in place to make sure the financial system continues to work properly,' Luxembourg's Finance Minister Luc Frieden said.

The report for the meeting showed the sector could be facing a credit crunch.

It said there could be 'a dangerous negative loop between the financial and the real sectors (of the economy), whereby funding problems and increasing risk aversion of banks may lead to disruptive deleveraging by banks, thereby generating a credit crunch, in some Member States, with consequences for the economic recovery and the credit quality of banking assets.'

'The risk of a vicious circle between sovereign debt, bank funding and negative growth developments is therefore apparent now, at a time where the margin for manoeuvre is considerably more limited than in 2008-2009,' the document said.

Ministers also discussed a tax on financial transactions, such as a levy on trading shares, an idea championed by Germany, France and Austria, but the idea does not have broad support.

'There is no common position on a financial transaction tax in Europe. We have only started the debate on that and there is no decision,' Internal Market Commissioner Michel Barnier said.

The US does not want to implement such a tax, making it difficult for Europe to go it alone for fear that it could push more trading to New York.

Germany has said it may pursue a tax solely in the euro zone if countries like Britain refuse to support it but even here, some states such as Italy are sceptical-Reuters