European Union economies faced sovereign credit rating downgrades as talks on resolving the Greek debt crisis appeared to collapse Friday.

The apparent failure of talks between Greece and its private sector lenders revived fears a Greek default might trigger a disintegration of the eurozone that links 10 of the 27 EU members into binding accords on the common currency, the euro.

The problem facing Greece was compounded by fears that leading rating agencies would react to the grim outlook and downgrade several EU countries. European stock markets dropped below 2 percent as the euro hit a 16-month low against the U.S. dollar. Market analysts said no respite was likely until the direction of the Greek debt rescue talks became clearer.

German Chancellor Angela Merkel and French President Nicolas Sarkozy were in urgent talks to salvage the rescue deal, which centers round a second Greek bailout of $165 billion.

However, the crisis became increasingly complex and emotionally fraught Friday as public opposition to further austerity measures gained momentum in Greece and government negotiators fought hard to clinch a deal on the the debt.

Greece is reported seeking a 50 percent write-off of its debt to private lenders. The deal is crucial in the government's quest for a package that would satisfy both the EU and the International Monetary Fund. Both the EU and IMF want a cap on Greek public spending, more austerity and tougher financial discipline.

Greek politicians already are in the firing line amid public fury over their handling of the crisis.

If a deal fails to materialize Greece will be the first country in the so-called First World to suffer a sovereign default in six decades.

An added worry is, if that happens, Greece may not be the only European nation defaulting and other financially troubled nations may follow. The contagion of endangered sovereign debt has touched Italy, Spain and Portugal. France risks being downgraded along with other major EU economies.

Hungary is outside the eurozone but its controversial policies and a severe downgrade of its financial health has turned its sovereign debt to junk.

When the debt crisis required additional rescue last year, rating agencies warned the entire EU could face downgrade.

To top it all, EU members face the prospect of having to switch their oil imports from Iran to alternative sources as the U.S.-led sanctions campaign gets into the full swing. Most of the continent is still in recession, and a switch to alternatives to Iranian oil has drawn complaints from members.

Iran is facing sanctions because the West believes it is using its nuclear energy program to develop nuclear weapons. Tehran says its program is only for peaceful purposes.

EU diplomats said a decision on barring oil imports from Iran was likely to cause divisions within the EU ranks. An EU-wide political fallout from sovereign credit downgrades and oil import changes is seen as a potential threat for incumbent governments.

Sarkozy fears a credit rating drop from the cherished triple A rating will hurt his chances of re-election in April.

Meanwhile, traders reported brisk business in distressed and junk European debt bonds by opportunistic managers of the so-called vulture funds.