German Chancellor Angela Merkel led European leaders on Tuesday in an effort to play down the threat of the troubled Italian banking sector triggering a bank crisis in the region.

"Altogether I do not see any critical development," Merkel said at a press conference in Berlin.

Italian Prime Minister Matteo Renzi has launched talks with Brussels over his plans to pump billions of euros into his nation's banking sector to shore up confidence in the banks, which have bad loans totalling 360 billion euros (397 billion dollars) on their books.

However, Brussels has been resisting Rome's planned financial measures, saying that the banks and not public funds should be used to help with bank recapitalization.

Speaking in Brussels on Tuesday, Italian Finance Minister Pier Carlo Padoan said: "Any possible intervention or actions by the state will be completely in line with the rules."

He went on to insist: "The banking system remains solid."

"I am very confident that these issues will be decided [in Brussels] and a good solution will be found," Merkel said, referring to the question of Italian financial support for its banks, which was also a topic at a meeting of eurozone finance ministers.

"The government is now engaged in finding precautionary solutions to support any eventual case of needed intervention," Padoan said.

Rome has already launched a series of bank reforms to shore up the Italian banking system, including new insolvency measures as well as plans for bank consolidation and moves to cut non-performing loans.

"We have already introduced a precautionary liquidity instrument," Padoan said. "This will be done in full protection of households and savers."

In its annual report on Italy released this week, the International Monetary Fund (IMF) commended the Renzi government's reform efforts, in particular in addressing the nation's troubled banks.

Financial sector reforms "are critical to entrench financial stability and support the recovery," the IMF wrote in its report.

However, the Washington-based organization said it backed further measures including stepped-up debt restructuring, strengthened bank supervision and a more extensive assessment of the quality of assets held by the banks.

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