ECB president calls for effective action to save financial markets

In a stern warning, European Central Bank president Mario Draghi said Europe's debt crisis, could cripple financial markets and the economy unless effective steps were taken by governments.

"We are in a very grave state of affairs and we must not shy away from this fact," Draghi told the European Parliament in a testimony.

Three months earlier the same group of lawmakers had heard Draghi's predecessor Jean-Claude Trichet saying the crisis had reached "systemic dimensions." Draghi said yesterday "the situation has worsened further" since then.

He added steps would need to be taken to restore economic growth and boost employment even as vulnerable governments reduced their budget deficits. Concerns over government-bond markets in some European countries, not only had worsened economic growth prospects but had also "led to severe disturbances in the normal functioning of financial markets and, ultimately, the real economy," he added.

He said the ECB had responded "decisively," and cited the bank's decision last month to make three-year loans available to commercial banks as also relax its collateral rules to expand access to the loans.

He said early results were "encouraging" and the measures had helped to avert a major credit crunch. This came as a reiteration of  comments made last week following the ECB's monthly meeting.