Standard & Poor's fired a second warning shot at the euro zone in 24 hours on Tuesday, threatening to cut the credit rating of its financial rescue fund as European leaders raced to find a political solution to their sovereign debt crisis.

British Prime Minister David Cameron said he would block a new European Union treaty proposed by Germany and France aimed at saving the euro, if British demands are not met. He said a new treaty must contain 'British safeguards'.

'I won't sign a treaty that doesn't have those safeguards in it, around things like, of course, the importance of the single market and financial services,' Cameron said.

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change EU rules to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiralling out of control.

Visiting US Treasury Secretary Timothy Geithner said after talks in Berlin he was encouraged by recent moves towards fiscal union in Europe and stressed the central role of the European Central Bank (ECB) in tackling the crisis.

Citing 'continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis', S&P put the ratings of 15 countries, including Germany and France, on review late on Monday for a downgrade by 1-2 notches.

The US-based agency went a step further yesterday, placing the top-notch rating of the euro zone's 440 billion euro ($589 billion) rescue fund, the European Financial Stability Facility (EFSF), on negative watch since it depends on the creditworthiness of the currency bloc's six AAA-rated sovereigns.

European Council president Herman Van Rompuy, who will chair a crucial summit of the 27-nation European Union this week aimed at turning the corner on the crisis, proposed giving a bigger permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding.

Germany has so far opposed any such move, which it says would breach a treaty ban on the ECB financing governments.

Van Rompuy said tighter budget oversight sought by Paris and Berlin for the 17-nation euro area could be achieved quickly with only minor tweaks to the EU treaty that might not require full ratification procedures in many countries.

He also said the issuance of joint euro zone bonds should be a long-term objective, challenging another German red line in a text likely to be the object of heated negotiations.

S&P warned of slowing economic growth amid so much austerity, predicting a 40 per cent chance of a fall in euro zone output.

A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries' borrowing costs rise still further.

Merkel brushed off the threat, saying: 'What a ratings agency does is its own responsibility.'

Her finance minister, Wolfgang Schaeuble, said the wake-up call was S&P's way of urging European leaders to act.-Reuters