The European Central Bank stepped up pressure today for a joint guarantee for bank deposits across the euro zone, saying Europe needed new tools to fight bank runs as the bloc's debt crisis drives investors to flee risk.

The European Commission's top economic official, Olli Rehn, warned that the single currency area could disintegrate without stronger crisis-fighting mechanisms and tough fiscal discipline.

The twin warnings came as worries about Spain's banks and Greece's survival in the euro area pushed the euro to a two-year low against the dollar and hastened a rush into safe-haven assets such as Austrian and French bonds, whose 10-year yields hit a euro-era low.

Spaniards alarmed by the dire state of their banks moved more money abroad in March faster than at any time since records began in 1990, official figures showed.

The €66.2 billion net capital flight occurred before the nationalisation of Spain's fourth biggest Lender, Bankia, in May due to massive losses from a burst property bubble.

Irish voters seemed set to approve in a referendum a European budget discipline treaty vital to continue receiving EU aid. But the outcome of a second Greek general election on June 17th, seen as crucial for Athens' future in the currency zone, is too close to call.

ECB president Mario Draghi urged Europe's leaders to clarify their vision for the single currency quickly, warning the European Parliament that the central bank could not fill the policy vacuum.

"We will avoid bank runs from solvent banks. Depositors' money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected," Mr Draghi said, calling for an EU-wide banking supervision and resolution system.

EU paymaster Germany, reluctant to risk more of its own taxpayers' money in support of euro zone partners, has so far rejected any such joint deposit guarantee.

German chancellor Angela Merkel refrained from comment on calls for a banking union but said Europe should be ready to consider all options to stem its sovereign debt crisis.

"There are integration steps which will require treaty changes. We are not at that stage today but nevertheless there are no taboos," she told a news conference in the Baltic town of Stralsund.

Another top ECB official, executive board member Joerg Asmussen, said in Frankfurt that the 25 or so most important banks in the euro area should be supervised by a supranational watchdog rather than just national authorities.

Mr Draghi, testifying before EU lawmakers, said the financial crisis had "heightened risk aversion in a dramatic way.

“I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little," he said, citing the repeated failure of national regulators to correctly assess the needs of failed Franco-Belgian bank Dexia and Spain's Bankia.

Another ECB policymaker, Bank of Italy governor Ignazio Visco, went further, saying political inertia and bad economic decisions had put "the entire European edifice" at risk and only a clear path to political union could save the euro."

There are now growing doubts among international investors about governments' cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency," Mr Visco told the Bank of Italy's annual meeting.

Global investors retreated sharply from equities in May and held more cash than at any stage since the crisis erupted in early 2010, Reuters' asset allocation polls showed.

EU Economic and Monetary Affairs Commissioner Rehn, speaking at a Brussels conference, said Europe needed both tighter budget discipline and more integrated rescue funds to avert a potential breakup of the euro.

"We need a genuine stability culture and a much upgraded common capacity to contain common contagion," he said.

"This is the case, at least if we want to avoid a disintegration of the euro zone and instead make the euro succeed."

The dramatic tone of EU and ECB officials raises pressure on Germany to drop its opposition to bolder rescue measures ahead of a June 28-29th summit that could be a turning point in the euro zone crisis.

In another sign of pre-summit tension, France's new Socialist government is refusing to back Germany's candidate for the influential role of chairman of euro zone finance ministers amid differences with Berlin over joint euro zone bonds and bank recapitalisation.

The European Commission, the bloc's executive, called yesterday for closer economic union and said its elements should include a banking union, joint financial supervision and bank deposit guarantees.

But a Commission spokesman said today there was no chance that euro zone banks could be directly recapitalised using the bloc's permanent bailout fund as it stands.

Spanish 10-year bond yields traded at 6.66 per cent, close to euro era highs, due to market expectations that Spain may need international help to keep its troubled banks afloat - a prospect flatly rejected by prime minister Mariano Rajoy.

"The levels are definitely worrying. Spain is reaching zones where it is harder and harder to finance itself in the capital market," said Viola Julien, fixed income analyst at Helaba Landesbank Hesse-Thueringen.

The uncertainty over Spain, the euro zone's fourth biggest economy, is making it harder for other member states to overcome their own debt problems, despite rigorous austerity programmes and structural reforms.

Italian prime minister Mario Monti said his country was threatened by "huge possibilities" of contagion, and pressure from rising sovereign bond yields could complicate reforms.

"It is obviously a difficult place to be in, when you have a country displaying massive and concentrated efforts of consolidation and structural reforms, which are obviously politically and socially costly, and sees its position threatened by huge possibilities of contagion," he said.

He warned of a popular backlash if investors demanded deeper fiscal cuts and budget discipline beyond what was already being undertaken.

Reuters