A crisis in Europe over budget belt-tightening has seized the attention of financial leaders meeting in the Canadian Arctic.

Finance ministers and central bankers from the Group of Seven major industrial countries also planned to try to settle differences yesterday on banking industry changes. There are fears that go-it-alone action such as President Barack Obama's plan to break up big banks will further hamper the world's fledgling economic recovery.

Canadian finance minister Jim Flaherty hoped his choice of the remote town of Iqaluit, where temperatures can dip to -40ºC in February, would make officials focus on the task ahead.

The G7 consists of the US, Japan, Germany, Britain, France, Italy and Canada.

The situation in Europe provided a sobering reminder that G7 policymakers still face major hurdles in repairing a broken global economy.

The Portuguese parliament's defeat of a government austerity plan on Friday triggered renewed concerns that it and other eurozone countries were having trouble tightening controls to manage their budget deficits.

On banking reform, the other G7 countries were expected to press US treasury secretary Timothy Geithner to explain the announcement by Obama last month that the US would seek tougher rules to prevent risky actions by big banks from toppling the entire financial system.

British chancellor Alistair Darling said the US proposal does not address the biggest threat – the links between banks that can quickly transmit loan troubles at one institution to the entire system.

Flaherty said G7 countries agreed on the need to continue with government stimulus programmes. But Germany and France have expressed concern about how long stimulus aid should be maintained. They worry about soaring budget deficits and the risk of inflation.