Stock markets around the globe rallied sharply on hopes European leaders will finally get a grip on the long-running crisis which threatening the euro project, even if analysts cautioned such euphoria could prove short-lived.

Papandreou and Merkel were both set to address the German Federation of Industry at its annual conference in Berlin and then hold a working dinner, where they are to discuss the Greek economy and proposed reforms by Athens.

The meeting between Merkel and Papadandreou comes two days ahead of a crunch vote in the German parliament to expand the rescue fund -- or European Financial Stability Facility -- for debt-mired Greece and other faltering countries.

Just eight of the 17 eurozone states have so far ratified the new EFSF powers agreed at a July summit.

In Germany, the bill is expected to pass but it is being seen as a key political test for Merkel, with some members of her governing centre-right coalition threatening to defect.

As a Greek debt default looms and the German economy slows, Europe and the world are looking to Berlin as the eurozone's paymaster to steer the euro to safety.

Europe's failure to tackle crippling Greek debt is "scaring the world," US President Obama warned on Monday as Germany rejected plans to boost funding for EFSF.

Europe "never fully dealt with all the challenges that their banking system faced," Obama said.

"It's now being compounded with what's happening in Greece," he said. "So they're going through a financial crisis that is scaring the world."

US Treasury Secretary Timothy Geithner also urged Europe to step up its response to the crisis, after a round of meetings involving the World Bank IMF and G20 since last Thursday.

"They recognized the need to escalate. They're going to have to put a much more powerful financial framework behind this," Geithner told ABC News.

"I really believe that you're going to see them do that but we wanted to make sure they do it as quickly as they can and as definitively as they can."

Germany on Monday hosed down a push to expand the EFSF, which is designed to defend the eurozone in the event of an escalating crisis.

EU Economic Affairs commissioner Olli Rehn had said earlier that the 440-billion-euro ($590 billion) EFSF, the cornerstone of a second Greek bailout, should be given "greater strength."

His spokesman Amadeu Altafaj said discussions were now centred on an "increase of the means at the EFSF's disposal" but German Finance Minister Wolfgang Schaeuble insisted there was no plan to boost the fund's warchest.

"We are giving it the tools so it can work if necessary," Schaeuble said, referring to the new powers allowing the EFSF to lend to countries such as Italy so as to get ahead of the crisis.

"Then we will use it effectively -- but we do not have the intention of boosting its volume," he said.

Schaeuble's intervention slowed the momentum built up during intense debt diplomacy in Washington over the weekend.

There, the International Monetary Fund, the United States and other G20 economies pushed Europe to ring-fence the really big risks such as Italy in a concerted effort to prevent the world falling back into recession.

Greece, Ireland and Portugal have all had to be bailed out by the EU and IMF to prevent a default which many fear could set off a fresh financial crisis even worse than that of 2008 while recent market turbulence has put Italy and Spain right in the firing line.