by Andrew Gully

LOS CABOS, Mexico, June 18, 2012 (AFP) - World leaders struggled to inject confidence into the global economy Monday at a G20 summit in Mexico dominated by a spiraling European debt crisis that is spooking markets and paralyzing growth.

Mexico's President Felipe Calderon welcomed the likes of US President Barack Obama, newly returned Russian leader Vladimir Putin and German Chancellor Angela Merkel to a conference center in the hills above the resort of San Jose del Cabo.

Two days of talks began at around 2130 GMT with US officials saying there had been a clear change in European thinking towards more growth-friendly policies and Obama saying he was "encouraged" by what he had heard of Europe's plans.

In an effort to build confidence in the frail global economy, the G20 leaders said they "will act together to strengthen recovery and address financial market tensions," according to a leaked copy of their draft statement.

"All G20 members will take the necessary actions to strengthen global growth and restore confidence," it said.

The optimistic language, however, could do little to hide the dismal economic backdrop, with the focus already shifting to Spain and its sky-high cost of borrowing after the brief respite provided by Greece's positive election result.

In Sunday's pivotal polls in debt-ridden Greece, parties committed to the terms of their European Union and IMF-led bailout held off a strong challenge by a leftist anti-austerity party.

The International Monetary Fund has indicated that it could now be open to a renegotiation of Greece's 130-billion-euro ($165 billion) bailout program.

But hopes that the Greek vote had helped the single currency bloc turn a corner in the crisis were dashed as attention moved onto the fragile economies of other EU members and Spanish borrowing costs soared to record levels.

Italian and Spanish stocks plunged and the euro fell against the dollar.

Obama, who fears the turmoil in Europe will drag down the broader world economy and torpedo his hopes of re-election in November, was to hold a separate meeting later Monday with European Union leaders to address the crisis.

"The president was encouraged by what he heard regarding ongoing discussions in Europe about the path they are pursuing to address the crisis," White House spokesman Jay Carney told reporters after Obama met Merkel on the G20 sidelines.

Merkel, leading Europe's largest economy, has emphasized financial responsibility, while Obama, along with French President Francois Hollande, have put a focus on growth.

"We're seeing a noticeable shift in the European discussion regarding the critical importance of supporting demand and job growth," senior US treasury official Lael Brainard told reporters.

But Merkel gave no indication that she was about to abandon her hardline stance on the austerity measures Europe imposed on indebted eurozone members, which some argue have sabotaged economic growth.

"Elections cannot call into question the commitments Greece made. We cannot compromise on the reform steps we agreed on," she told reporters on arrival in Los Cabos, a tourist haven on the southern tip of the Baja California Peninsula.

Merkel said that full details of plans to extricate Europe from its vicious cycle of debt would not be revealed until the European summit at the end of the month, but that she expected a "good" G20.

In a sign of the underlying tensions at the summit, EU Commission chief Jose Manuel Barroso bristled when questioned on European credibility and issued a fierce defense of the bloc's handling of the crisis.

"Frankly, we are not coming here to receive lessons in terms of democracy or in terms of how to handle the economy," he said.

The International Monetary Fund, hoping to prevent a worsening of the global economic crisis, called last year for $500 billion in an emergency firewall to support nations at risk of contagion, but the money has fallen short.

Leaders of the so-called BRICS -- Brazil, Russia, India, China and South Africa -- expressed reluctance in Los Cabos about stumping up more cash until existing funds had dried up and emerging nations were given greater IMF clout.

During the G20 summit, which runs through Tuesday, several of the powers present were also holding important bilateral meetings -- none more important than the keenly watched head-to-head between Obama and Putin.

After their first meeting since Putin's return to the Kremlin in May, the pair issued a joint call for an end to violence in Syria and said its people should be allowed to democratically decide their future.

Obama sees his "reset" of relations with Russia as a key achievement, despite Putin's often strident anti-Western rhetoric, but the two leaders remain far apart on many issues.