BRUSSELS, Belgium - November 10, 2011 - German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller eurozone, EU sources say.

The claims come as soaring Italian borrowing costs saw global markets tumble overnight and policy makers outside the eurozone warned the crisis could spread.

Meanwhile, political deadlock continues in Greece and Italy, where talks have stalled to replace both countries' outgoing prime ministers.

EU sources say discussions among politicians in Paris, Berlin and Brussels raised the possibility of one or more countries leaving the zone, while the core pushes to deeper economic integration.

"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels said, speaking on condition of anonymity because of the sensitivity of the discussions. "We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part."

French president Nicolas Sarkozy gave some idea of his thinking on Tuesday, when he said a two-speed Europe - the eurozone moving ahead more rapidly than all 27 countries in the EU - was the only model for the future.

The change has been discussed on an intellectual level but had not moved to operational or technical discussions, the EU official said.

But European Commission president Jose Manuel Barroso issued a stern warning of the dangers of splitting the zone.

"There cannot be peace and prosperity in the north or in the west of Europe, if there is no peace and prosperity in the south or in the east," said Barroso.