Mrs Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. American officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic.

Fears of a worsening debt crisis slammed European stocks on Monday, especially shares of French banks, forcing the French government to declare its support for its three largest financial institutions. The turmoil added to worries that the Greek crisis would prove difficult to contain without more robust action from Germany and, ultimately, its taxpayers.

The project of European integration, which began in the difficult years after World War II, is also on the line. If Greece were forced to abandon the euro, as more and more voices on the German right are demanding, it would be a jarring setback for solidarity on the Continent.

Events appear to be forcing Mrs Merkel to tip her hand. With the latest market assault this week on French financial institutions, the spillover from the debt crisis has now reached the German border. With first Italy and now France affected, problems once dismissed as confined to the distant periphery of Greece and Portugal have arrived at the core of Europe, and with them unavoidable questions about the continent's future.

Earlier on Monday, EU foreign policy chief Catherine Ashton, who is in Cairo for talks with officials at an Arab foreign ministers' meeting on the Palestinian UN bid, said the European Union has still not decided on a united position yet.

The Palestinians decided to seek United Nations recognition of statehood after years of negotiations with Israel failed to deliver the independent state they want to establish in the West Bank, the Gaza Strip and East Jerusalem - areas occupied by Israel in the 1967 Middle East War.

The Palestinians currently hold UN "observer" status. Full member status would require approval in the Security Council, where Israel's ally the United States had said it would veto any such resolution. "The Arabs had agreed to apply to the United Nations for a full-fledged Palestinian state with its capital East Jerusalem," Qatari Prime Minister and Foreign Minister Sheikh Hamad bin Jassim al-Thani, chairman of the follow-up committee on the Palestinian UN bid, said at the start of the meeting.

Breitbart.com reports: Russia supports the Palestinian bid to win UN statehood despite resistance from Israel and the United States, Moscow's ambassador to the United Nations said on Monday. "We will, of course, be voting for any of the Palestinians' proposals," Russia's UN ambassador Vitaly Churkin was quoted as saying by the Interfax news agency. "We are saying that whatever you decide to do, we will support you."

The king described a recent conversation he held in the US with "one of the Israeli intellectuals" who commented on events in the Arab world, arguing that they were good for Israel. "I replied and said that it was the opposite and that Israel's situation today is more difficult than ever before."

Abdullah reiterated that his country would not serve as an "alternative homeland to the Palestinians." According to the Jordanian leader, "Jordan is Jordan and Palestine is Palestine. We support all Palestinian rights and the establishment of an independent Palestinian state - our policy hasn't changed. The subject of an alternative homeland must not be part of the discussion. It is unacceptable."

Abdullah sought to reassure everyone, saying "I have never heard from any senior American official - whether Bush, Clinton or Obama - any pressure on Jordan that the Palestinian solution should come at its expense. Jordan", the king added, "will defend its rights and support its vision of a permanent solution that would ensure the establishment of a Palestinian state with Jerusalem as its capital and a just realization of the right of return and adequate compensation."

MP George Eustice said Europe was "too important to be swept under the carpet" despite past "scars" for the Conservative Party over the issue. Ministers have ruled out any imminent renegotiation of European treaties. Attitudes to Europe within the Conservative Party have hardened in recent months as EU leaders have spoken openly of the prospect of closer fiscal union to support the eurozone. Eurosceptics see the crisis as an opportunity to halt further European integration.

Backbencher Mr Eustice, David Cameron's former press secretary, told the BBC there was the potential for treaty negotiations later this year and the group aimed to do the "heavy lifting" - preparatory work - ahead of any potential treaty renegotiations. "It is absolutely imperative that Britain has a very coherent plan, as to what we want the European Union to do in the future, how we start to take powers back so we actually have a new relationship with the European Union that is settled."

BBC political correspondent Ben Geoghegan said he did not see any members of the government at the meeting but many of those who attended were new MPs. One backbencher told him: "There is a growing storm coming over Europe and we have to have something important to say about it."

Unscrupulous headteachers often continue to take the cash for these "ghost pupils", letting them effectively drop out of education before leaving primary school. Last night there were calls for an "electronic education passport" on every child to stop them from being lost by schools and leaving the system.

The research - No Excuses: A Review of Educational Exclusion, carried out by Work and Pensions Secretary Iain Duncan Smith's think tank Centre for Social Justice - found that at one primary school, gang culture was so endemic children aged nine to 11 arrived wearing the colours of their local street gang. Schools try to hide their gang problems because of fear of damage to their reputation, the report goes on to reveal.

The CSJ report identifies a number of deep-seated factors that cause disruptive behaviour. Family breakdown and domestic abuse are among the causes. The report cites previous CSJ research showing that a child not growing up in a two-parent family is 75 per cent more likely to fail at school. It also cites NSPCC research showing that almost one million secondary school children had been physically attacked by an adult, raped or sexually assaulted, or severely neglected at home. Lack of nurture and communication in the first three years of life is another underlying cause.

The UN opens the General Assembly on September 20, with Abbas scheduled to address the gathering on September 22, the last day of the first of two sessions. Germany has already said it will vote against the resolution. Westerwelle spokesman Andreas Peschke said at a briefing Sunday morning the German foreign minister would "again touch on the possible ways and means to restart direct talks" during his visit to Ramallah. "What the Palestinians are going to present is not all that clear yet," he added, "because they have not yet completed their internal discussions."

Westerwelle is expected to meet with Jordan's King Abdullah II on Monday, before returning to meet with Prime Minister Binyamin Netanyahu and Foreign Minister Avigdor Lieberman. Despite its desire to achieve statehood, the PA has not yet managed to attain unity even within its own ranks. The Abbas government controls only the PA-ruled regions of Judea and Samaria; the Hamas terrorist organization wrested control of Gaza from Abbas' Fatah faction in a bloody milita war that ended in June 2007.

But control over Gaza is no longer entirely in the hands of Hamas either. Since that time, the terrorist organization has found itself fighting for its life with the mushrooming Salafist Islamic movement linked to the global jihad organization backed by Al Qaeda. The United States, a permanent member of the UN Security Council, has confirmed that it will exercise its veto to block any move by the PA to become a full voting member state of the international body.

Greece clearly needs help escaping from its financial quagmire, according to German European Union Energy Commissioner Gunther Oettinger. In fact, the EU should consider using some "unconventional" methods to increase motivation among Greek officials for solving the country's problems, he told daily Bild on Friday.

"There has been the suggestion too of flying the flags of deficit sinners at half mast in front of EU buildings," the member of Chancellor Angela Merkel's conservative Christian Democrats told the paper. "It would just be a symbol, but would still be a big deterrent."

Another tactic for pulling the debt-stricken country out of crisis could be replacing "the obviously ineffective administrators" there, he added. Because Greek officials have failed at collecting outstanding taxes and selling state-owned assets as planned, Oettinger alleged, experts from other EU nations should be sent in to do their jobs instead. "They could operate without concern for resistance and end the inefficiency," he told Bild.

After all: "Those who demand solidarity from the other countries must also be prepared to give up partial responsibility for a certain time."

But isn't there a glaringly obvious alternative way of financing these desperately needed reforms, one that would avoid any need to increase extortionate charges still further? Even if the 10 billion pounds figure for separating banks' high street operations from their high-risk investment arms proves correct - a very big 'if' - it is dwarfed by the sums bankers pay themselves in their annual orgy of bonuses.

In the last financial year alone, at a time of growing hardship for millions, the City helped itself to bonuses of a staggering 14 billion pounds. Indeed, many will wonder what possible justification there can be for paying bankers any bonuses at all, while the big five banks still enjoy taxpayers' subsidies estimated at 46 billion pounds a year. Reforms have become necessary because of the bankers' recklessness with our money. As Business Secretary Vince Cable insists, it is the guilty and not their victims who must pay for them.

The International Air Transport Association, whose members include British Airways, Virgin Atlantic and more than 200 global airlines, said main airports were struggling to cope with mounting layers of safety regulations that now cost the financially troubled industry $7.4 billion (4.6 billion pounds) a year to implement. Tony Tyler, director general of IATA, said: "We spend a huge amount of resource on screening people who quite frankly do not need it."

"We need to find a better way of doing it. Apart from the cost, we are putting our customers through an immensely complicated and, most of the time, unnecessary, hassle. And airports are creaking at the seams to find the space and capacity to deal with this," he added.

Philipp Roesler, Germany's economy minister, said an "orderly default" for Greece could no longer be ruled out and branded the country's deficit-reduction measures "insufficient". The warning is likely to spook financial markets further and comes despite Greece yesterday announcing a fresh 2 billion euros (1.7 billion pounds) of budget cuts and the introduction of a country-wide real estate tax.

Evangelos Venizelos, the finance minister, said the cuts and tax measure were necessary to allow Greece to meet obligations demanded by the European Union and IMF in exchange for bail-out funds. Writing in the Die Welt newspaper, Mr Roesler said: "To stabilise the euro, we must not take anything off the table in the short run. That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available."

He said such a default would mean "re-establishing the affected state's ability to function, perhaps with a temporary restriction of its sovereign rights".

It came less than a week after Turkey, Israel's other major ally in the Muslim world, announced it was expelling the Israeli ambassador and downgrading its relationship to the lowest possible level after a deadly skirmish involving a Turkish aid vessel that was attempting to deliver supplies in defiance of Israel's blockade of the Gaza Strip.

With another potential predicament brewing later this month when the Palestinians are expected to request membership and statehood at the United Nations, Israeli-Arab relations appear to be plunging to their lowest point in years. "Within a week Israel has found itself two friends down and about to face a so-called diplomatic tsunami with the Palestinians," said one European envoy in Jerusalem, who spoke on condition of anonymity under diplomatic protocol. "I would be nervous if I was an Israeli diplomat today."

The damage to relations with Egypt and Turkey has struck many Israelis. Turkey was the first Muslim-majority country to recognize Israel as a Jewish state in 1949 and Egypt was the first Arab country to sign a peace treaty with Israel in 1979.

Palestinian legislator Hanan Ashrawi, who will help launch the bid at the UN, told McClatchy that Israel had "put itself in a corner."

"We will go forward with this despite the threats from Israel and its allies. When the vote happens Israel will see how isolated it truly is," Ashrawi said. She added that the United States, Israel's main ally, would also be "embarrassed. I think the United States has been warned time and time again - from its own people - that its partnership with Israel might not be in its best interest right now," she said. "But they continue to stand by Israel, and ignore the changes in the region that the Arab Spring is bringing."

One protester in Grosvenor Square said: 'You will always face suffering, you will always face humiliation, unless you withdraw your troops from Muslim lands.' A small group of Muslims staged a counter-demonstration nearby, holding up placards reading 'Muslims Against Extremism' and 'If You Want Sharia, Move To Saudi'. Abdul Sallam, 41, who was waving a sign that read 'Keep The Silence', travelled down to London from his home in Glasgow to show the strength of his feelings.

He said: 'I'm a Muslim. What they're doing is bringing shame on all Muslims. This is not part of the teachings of Islam. Islam is all about peace, but what they want to do is hate other people. Islam teaches you that when you see anything bad or evil, you should speak out against it. If the moderate Muslims all came out and spoke out, that would defeat them. I am proud to be British. I love my country. All these people are doing is breaking Britain apart.'

Earlier, a group of English Defence League protesters were ordered to move on to accommodate the anti-American demonstration. The 60-strong group briefly scuffled with police as they were forced away from their original location to a different part of Grosvenor Square. Twenty people were arrested for breach of the peace as the group was dispersed towards Oxford Street. And at least four more arrests were made as police escorted the Muslim group back towards the Central London Mosque in Regents Park.

The smoke was still rising from the rubble of the World Trade Center when Richard Armitage, at the time the US deputy secretary of state, spoke in the aftermath of the 9/11 attacks. "History begins today," he said. In the coming decade, Armitage would turn out to be right - except the politician could not have foreseen how tragic the history would be following the epochal event. It is the history of the decline of the USA as a superpower.

Immediately before the attacks, this country was in full bloom - like Rome at its peak, as TV host Joe Scarborough recalls today. The Republican President George W Bush had inherited a fat budget surplus from the Democrat Bill Clinton. In Kosovo, the US, which Madeleine Albright dubbed "the indispensable nation," had just shown the Europeans how it could resolve conflicts, even in their own backyard. Bill Gates and Microsoft were still cool.

Then came the planes, piloted by the followers of Osama bin Laden - and for a brief moment, the superpower seemed even more powerful than ever. Palestinian leader Yasser Arafat had himself photographed donating blood for the victims. Even the French all suddenly wanted to be Americans. German Chancellor Gerhard Schroder promised "unlimited solidarity." What followed was an unlimited mistake. Bin Laden had hoped to entangle the Americans in bloody wars. How well he would succeed in doing this, he probably could not have imagined himself.

America was trapped in Iraq for years, where a victory was a long time coming and was never a real one. It is currently trapped in Afghanistan, where victory no longer even seems possible. And it is trapped in an embrace with its ally Pakistan, which it does not trust and yet cannot release.

These are costly defeats for America and the rest of the world. According to a conservative estimate by Brown University, there have been almost 140,000 civilian casualties in Afghanistan and Iraq. The massive retaliation cost more than $3 trillion (2.2 trillion euros) - dollars that would have been better used in America's schools or in the wallets of US citizens.

The diplomatic crisis, in which winds unleashed by the Arab Spring are now casting a chill over the region, was crystallized by the scene of Israeli military jets sweeping into Cairo at dawn on Saturday to evacuate diplomats after the Israeli Embassy had been besieged by thousands of protesters. It was an image that reminded some Israelis of Iran in 1979, when Israel evacuated its embassy in Tehran after the revolution there replaced an ally with an implacable foe.

"Seven months after the downfall of Hosni Mubarak's regime, Egyptian protesters tore to shreds the Israeli flag, a symbol of peace between Egypt and its eastern neighbor, after 31 years," Aluf Benn, the editor in chief of the left-leaning Israeli newspaper Haaretz, wrote Saturday. "It seems that the flag will not return to the flagstaff anytime soon." Egypt and Israel both issued statements on Saturday reaffirming their commitments to their peace treaty, but in a televised address on Saturday night, Prime Minister Benjamin Netanyahu of Israel warned that Egypt "cannot ignore the heavy damage done to the fabric of peace."

Facing crises in relations with Egypt and Turkey, its two most important regional allies, Israel turned to the United States. Throughout the night on Friday, desperate Israeli officials called their American counterparts seeking help to pressure the Egyptians to protect the embassy. President Obama "expressed his great concern" in a telephone call with Mr Netanyahu, the White House said in a statement, and he called on Egypt "to honor its international obligations to safeguard the security of the Israeli Embassy."

Washington - for whom Israel, Turkey and Egypt are all critical allies - has watched tensions along the eastern Mediterranean with growing unease and increasing alarm. And though the diplomatic breaches were not entirely unexpected, they prompted a flurry of diplomatic activity in Washington.

"Egypt is not going toward democracy but toward Islamicization," said Eli Shaked, a former Israeli ambassador to Cairo who reflected the government's view. "It is the same in Turkey and in Gaza. It is just like what happened in Iran in 1979."

The decision by Jurgen Stark to quit comes in the wake of the Frankfurt based European bank's decision to restart its programme of buying the sovereign bonds issued by Greece, Italy and the other struggling euroland nations. Stark is known to be an opponent of the bond buying effort fearing that it undermine the credibility of the European Central Bank and could knock down the value of the euro on the foreign exchange markets and lead to future inflation.

The German official is known to be a monetary hawk and clearly opposes the efforts to prop up the single currency at Germany's expense. His departure for what were described as 'personal reasons' could not come at a worse time for the ailing euro area and sparked a sell off the single currency against the dollar. Immediately after the resignation the euro dropped 1.5 per cent against the American dollar and almost one per cent against the pound to Euro 1.1494.

The shock departure comes in the wake of this week's ruling by the German Constitutional Court which stated that Berlin could support the weaker countries of the eurozone providing the rescues are first approved by the German parliament, the Bundestag. Clearly, Stark was alarmed by this development and fears it could undermine Germany's efforts to keep the euro as a 'hard' currency area and a bulwark against inflation.

Without German support for the bond buying programme, efforts to give Greece and Italy more time to sort out their enormous budget problems could be seriously undermined. This potentially could speed up Greece's journey to default, devaluation and exit from the euro and the return of the drachma. He is to be succeeded by former Goldman Sachs banker and governor of the Bank of Italy Mario Draghi who has been described as 'German' Italian because of his belief in sound money.