Two days before a crucial European Union summit, European Council President Herman Van Rompuy released a seven-page report on closer fiscal and banking union envisaging a eurozone treasury that would issue common debt in the medium term.
Merkel immediately stamped on the idea of mutualising debt – favoured by France, Italy and Spain – at a meeting of lawmakers from her Free Democratic coalition partners in Berlin, according to people who attended the closed-door session.
"I don't see total debt liability as long as I live," she was quoted as saying, a day after branding the idea of euro bonds "economically wrong and counterproductive".
Monti ready to negotiate until Sunday
Political tensions were already rising before word emerged of Merkel's dismissive comments.
Italian Prime Minister Mario Monti told parliament on Tuesday (26 June) he would repeat his call for the European Financial Stability Facility and the European Stability Mechanism, the two funds set up to provide a "firewall" against the spreading debt crisis, to be used to help ease the pressure on Italian debt.
"The awareness of what is at stake is emerging slowly, that everyone needs to be disciplined in their own house but that this is not sufficient because there are systemic faults."
Italy is proposing to use the funds to help limit the spreads over German Bunds on bonds issued by countries that respect EU budget rules.
The proposal has run into stiff opposition from Germany, the largest economy in the European Union and the bloc's effective paymaster, and has been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank.
Like Merkel, Weidmann said eurobonds could be "the final step of closer integration" in the eurozone.
Monti said he was surprised by what he called Weidmann's "misunderstanding" of the proposal, which he said was not a means of lessening pressure for budget discipline.
He said he would not just rubber stamp conclusions of the EU summit and was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets.
Market scepticism sets in
Spanish and Italian bond yields rose again on Tuesday as scepticism set in before the EU summit.
Investors want to see bold moves to underpin the European currency union and halt the inexorable contagion from one debt-stricken country to another. But with 27 EU countries and 17 in the eurozone, quick steps are one thing Europe can't take.
The Brussels summit is expected to agree on a growth package pushed by France worth around €130 billion in infrastructure project bonds, reallocated regional aid funds and European Investment Bank loans.
Leaders will also discuss proposals for a banking union but while they are likely to agree to give the European Central Bank power to supervise big cross-border banks, Merkel is resisting any joint deposit guarantee or common bank resolution fund.