Berlin made clear on Wednesday that a proposed tax on financial transactions would have to apply to the entire European Union, but renewed Franco-German backing for the levy still unnerved investors and depressed shares in European stock exchanges.

While Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, pledged to draw up a joint proposal the leaders face an uphill task in breaking the international deadlock over implementing the tax.

Yet the show of political will from Berlin and Paris was enough to spook the markets and draw an angry response from business groups, which dismissed the transaction levy as unworkable, counterproductive and damaging to growth.

After a two-hour meeting in Paris on Tuesday, Mr Sarkozy and Ms Merkel ordered officials to prepare a transaction tax proposal by September, which will “contribute” to the European Commission’s existing work on a levy. France and Germany will later this year repeat their attempt to reach a deal at G20 level and, failing that, push for a EU-wide tax.

But the initiative faces many of the same political obstacles that have thwarted past efforts to introduce the tax. Several G20 nations remain implacably opposed, Britain disapproves of the EU moving unilaterally, and there remains resistance among many eurozone members to acting without the City of London. Any EU-wide measure would require agreement from all 27 member states.

The German Free Democratic Party, Ms Merkel’s junior coalition partners, on Wednesday underlined the political difficulties ahead by insisting such a tax must be at EU level so that Germany is not put at a disadvantage – a position broadly echoed by officials in Berlin. Ireland is stressing that it will only support measures that include London.

Analysts were doubtful the plan would attract widespread support. Chris Allen, an analyst at Evercore Partners in the US, said the move “appeared to be desperate times calling for desperate measures”.

Meanwhile Sony Kapoor, head of the Re-Define think tank, argued that while political support was gradually building for a tax of some form, the timing of the Franco-German proposal “was meant as a crowd-pleaser”.

The so-called “Tobin tax”, named after the US economist who first proposed the levy in the 1970s, has been a perennial favourite of policymakers, charities and pop-stars keen to raise money for good causes. But it has never won the political support it needs.

Germany has been pushing for a financial transaction tax for more than a year and included potential revenues of €6bn from such a tax in his long-range budget planning. The tax is seen in Germany both as a useful source of revenue, which would be politically popular in taxing unpopular financial institutions, and as a means of curbing the most speculative forms of market trading, such as micro-trading.

The Commission is also working up both plans to implement an EU tax and a related proposal to use the proceeds to fund the EU budget – an idea that is struggling to win support among member states.

The Association for Financial Markets in Europe (AFME) said the cost of a tax would hit growth. “The financial services industry should not be seen as an additional source of tax revenue but as an essential part of a stable and sustainable economy,” said Simon Lewis, AFME’s chief executive. Analysts also pointed out that a tax on financial transactions was introduced in Sweden in the 1990s after a financial crisis but subsequently dropped as trades increasingly moved abroad.

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