BERLIN — German Chancellor Angela Merkel said Europe's banks should look first to raise money in the private sector before turning to governments to bolster their financial cushions against potential losses from the continent's sovereign debt crisis.

An upcoming summit of the bloc's 27 leaders should send a "signal" regarding a coordinated recapitalization of Europe's banking sector to ensure the "real economy keeps functioning," Merkel said Friday at the chancellery in Berlin, speaking alongside visiting Dutch Premier Mark Rutte.

Speculation that Europe is looking at a coordinated plan to put more money into its shaky banking sector to withstand a possible default by Greece on government bonds has helped stock markets rally over the past couple of days, following a dismal start to the week.

Merkel said a recapitalization, if necessary, will have to follow a clear "hierarchy," with banks being pushed first to seek fresh private investment, and only then turning to government for more money.

"First the banks have to try themselves to get capital. If that approach fails, then the member states' government institutions will take effect, just as we have done in 2008, 2009," she said in a reference to the capital injection some banks received during the financial crisis.

"And only then, when a country can't manage this on its own, may the EFSF facility be used," she added, saying that any assistance from the European Financial Stability Facility, Europe's €440 billion ($590 billion) bailout fund, would only be granted with tough strings attached.

Merkel met earlier with Eurogroup Chairman Jean-Claude Juncker behind closed doors.

Merkel had already spoken out in favor of a coordinated recapitalization of Europe's banking sector on Wednesday in Brussels, and reiterated her position Thursday following talks with the head of the International Monetary Fund, Christine Lagarde.

Rutte, whose parliament on Thursday became the latest to approve an expanded eurozone bailout fund, said he agreed with Merkel that the EU leaders should discuss the issue at their Oct. 17-18 summit in Brussels.

"It is obvious that there won't be a panacea that will pull us out of the crisis, this is a long-term issue," Rutte said.

The International Monetary Fund, a key player in the 17-nation eurozone's debt crisis, said banks across the continent face up to €200 billion ($267 billion) in potential losses on government bonds, and should look to boost their capital cushions enough to restore a loss of confidence in the sector.

Some of that money could come from private investors via capital increases, but analysts expect that governments may have to put up significant amounts for lenders than can't raise money on the markets.

The EU disputes the IMF's €200 billion estimate, but has been warning that lending between banks and from banks to businesses is threatening to freeze up. Banks are afraid to lend to each other for fear they won't get paid back.

Some analysts have warned that this freeze could soon create conditions similar to the aftermath of the collapse of U.S. investment bank Lehman Brothers in 2008. That choked off lending to the wider economy and caused a deep recession.

Merkel refused to give a price tag to a possible new round of bolstering the banks' balance sheets, saying it was up to the European Banking Authority to determine the institutes' capital needs.

"We all know that the banks have to function so that the real economy keeps functioning," she said.