EUROPEAN bankers and politicians leapt to defend the region's banks yesterday, rejecting an International Monetary Fund estimate that they need 200 billion euros (US$290 billion) in new capital to reflect sovereign debt losses.

IMF chief Christine La-garde's call on Saturday for mandatory capitalization of European banks to prevent a world recession has reignited a debate over whether they have sufficient capital to withstand a severe downturn.

The clash highlights diverging views about the underlying safety of the European banking system. The IMF and the International Accounting Standards Board have both voiced concerns.

But European regulators, politicians and banking associations argue banks have a sufficient capital cushion to cope with market turbulence and sovereign debt worries.

A source said the IMF had estimated European banks could face a capital shortfall of 200 billion euros.

The German VOEB association, which represents lenders, said: "We do not understand how the IMF has come to this conclusion. Earnings statements do not back such a conclusion for German banks."

France took a similar line on its banks, with French Budget Minister Valerie Pecresse saying they were not a cause for concern. She added: "French banks are now better capitalised than a year ago. They passed stress tests which were extremely tough less than a month ago. I do not think there is any cause for worry."

US investment bank -JPMorgan estimated in mid-July that European banks had a capital deficit of 80 billion euros. It said UK banks needed 25 billion euros, the French 20 billion euros and German lenders 14 billion euros.