Obama says Europe's debt crisis is "scaring the world".

By Business editor Peter Ryan

Barack Obama has urged European leaders to confront the deepening sovereign debt crisis, warning their inaction is "scaring the world".

Listen to my analysis of this latest development broadcast on the "The World Today".

The US president's blunt message follows an earlier warning from his treasury secretary Timothy Geithner that a fresh economic shock from Europe could cause cascading defaults and runs on banks.

"What's happening in Europe, they have not fully healed from the crisis back in 2007 and never fully dealt with all the challenges that their banking system faced," he said.

"It's now being compounded by what's happening in Greece.

"So they're going through a financial crisis that is scaring the world, and they're trying to take responsible actions, but those actions haven't been quite as quick as they need to be."

The pressure on the EU is immense - the World Bank and the International Monetary Fund have already urged EU leaders to get their act together and agree on a plan.

EU leaders appear to be listening and say they are inching towards a multi-trillion-dollar bailout mechanism to firewall Italy and Spain from the debt contagion.

Mr Obama's re-election is dependent on turning around the economy, getting unemployment below 9 per cent, and avoiding another recession.