The situation forms a vulnerable backdrop for finance officials from the world's leading economies, who gather in Washington this week for the Group of 20/International Monetary Fund/World Bank meetings.

The managing director of the IMF, Christine Lagarde, has offered this blunt description: "The risks remain high; the situation fragile."

Stock markets have rallied the past few months on relief that Europe averted a major financial crisis at the turn of the year. Credit goes to the European Central Bank for pumping money into debt markets, Greece for striking a debt restructuring deal after long and torturous negotiations, and to Italy, Spain and Portugal for embracing tough budgetary reforms.

But these actions have restored only a tentative calm.

A surge in Spain's 10-year bond yields last week to test the 6 percent level last reached at the height of the euro zone debt crisis in 2011 - a sign that investors are demanding higher returns to compensate for perceived risk - has underscored this fragility. Spain's government bond auction on Thursday of two-year and 10-year debt will offer a fresh test of confidence in its economy.

The concern is that European Union leaders have imposed too-rapid budget cuts on its deeply indebted members, stifling growth today while doing too little to put the building blocks in place to ensure healthy growth tomorrow. This leaves the euro zone vulnerable to further market attacks.

"It is very important to avoid a vicious cycle of economic contraction and budget cutting," said Charles Dallara, managing director of the Institute of International Finance, which represents big global banks.

EU leaders have taken two important steps so far. They have agreed on a new budgetary framework for EU members and set up a $930 billion rescue fund to handle future sovereign crises.

But bankers and the IMF say what is needed next if Europe wants to break the vicious cycle of financial contagion is for leaders to lay out a clear road map toward fiscal integration for the euro zone in the medium term, and the ECB to make clear it will keep interest rates low in the short term.

Germany has resisted those steps, and even plans to take the simpler steps toward fiscal union, such as issuing common euro-zone bonds, are highly unlikely ahead of French elections and an Irish referendum on the EU's new fiscal treaty this spring.

RIPPLES WIDEN

Meanwhile, growth has ground to a halt in France, and damage has spilled into the emerging economies of Eastern Europe, whose export industries are closely tied to euro zone markets. Eastern European banks, many of which are owned by Western European institutions, also are cutting back sharply on credit supply, deepening the region's woes.

China, the world's second largest economy, is feeling the pain as well. Its exports to the European Union, China's largest market, shrank by over 1 percent in the first quarter. That contributed to China's disappointing growth in gross domestic product in the first quarter of 8.1 percent, the slowest pace in almost three years and down from 8.9 percent in the fourth quarter.

Brazil, which had been one of the world's fastest growing economies, is also is facing a sharp slowdown. Growth tumbled last year to 2.7 percent, less than half its 2010 pace, and the government has cut taxes, launched fresh attempts to weaken its currency, and the central bank is cutting interest rates aggressively to shore up growth.

The outlook for the United States, the world's biggest economy, was muddied after jobs creation in March came in at only half the pace seen in the prior month, denting optimism that U.S. growth was poised to accelerate. More data this week could provide some clarity. Retail sales for March, to be released on Monday, and industrial output and housing data, out on Tuesday, are all expected to show modest growth continuing.

The IMF's verdict on the global economy will be released on Tuesday. That will be followed by the meeting of the Group of 7 rich nations on Thursday. The G20 finance ministers and central bankers meet on Friday, and Europe is bound to face pressure to show some willingness to move eventually toward fiscal union.

At the same time, a major battle is brewing over bolstering IMF resources. The international lender, concerned that Europe will not act quickly enough to prevent another sovereign debt crisis from erupting on its shores, wants more firepower to help countries fight financial crises.

The IMF is seeking up to $600 billion from its members. But its funding request appears to be getting whittled down in size and swept into a bigger battle by emerging economies demanding greater voting power at the IMF, commensurate with their growing economic clout.

Their case gains potency as the World Bank, the IMF's sister organization, looks poised to reject a Nigerian candidate to as its new head. The U.S. candidate, Jim Yong Kim, a Korean-American health expert, appears almost certain to win the post when the World Bank board meets on Monday, holding fast to the long-held tradition of having an American at the helm of the World Bank and a European at the helm of the IMF.

These fights will add to uncertainty over whether world leaders can draw a firm line under the financial crisis.

"I think politics may prevent much progress over the next few months," said Marc Chandler, global currency strategist at Brown Brothers Harriman.