* Merkel and Cameron meet after war of words on euro
* Berlin, London no closer on financial transaction tax
* Cameron wants "power and punch", Merkel goes "step by step" (Recasts after news conference)
By Stephen Brown
BERLIN, Nov 18 The leaders of Germany and Britain sent out conflicting signals on Friday about how to solve the euro zone's debt crisis and admitted they had failed to narrow differences over the introduction of a financial transaction tax in Europe.
At a news conference in Berlin, British Prime Minister David Cameron and German Chancellor Angela Merkel tried to paper over divergent views on European policy that have sparked a war of words between politicians and media in both countries.
But they could not mask differences over how the single currency bloc's debt crisis should be handled, with Cameron calling for "decisive action" to stabilise the euro zone and Merkel making clear she favoured a "step-by-step" approach.
"My German isn't that good, I think a bazooka is a superwaffe, am I right?" Cameron said in response to a question about his call for euro zone policymakers to use a "big bazooka" approach to the crisis.
"The chancellor and I would agree that whatever you call this we need to take decisive action to help stabilise the euro zone," he said, citing the need for strong action on Greece, a rescue fund with "power and punch" and a recapitalisation of European banks.
Merkel struck a more cautious note. She has come under pressure to support bolder crisis-fighting steps from the European Central Bank (ECB), such as using it as a lender of last resort for the bloc or backstop for the bloc's bailout fund, the so-called European Financial Stability Facility (EFSF).
So far she has resisted, backing the argument of the German Bundesbank that this would violate the ECB's inflation-focused policy mandate. She is focusing on changes to the EU's Lisbon Treaty to force other euro members to adopt German budget discipline.
"The British demand that we use a large amount of firepower to win back credibility for the euro zone is right. But we have to take care that we don't pretend to have powers we don't have. Because the markets will figure out very quickly that this won't work."
Asked about Germany's push for the introduction of a financial transaction tax in Europe, Merkel admitted the two leaders "did not make any progress".
"Naturally there are differences. But Europe can only prevail if all the strong countries of the European continent are represented and if we have a bit of tolerance for the different views," Merkel said.
At a meeting of Merkel's Christian Democrats (CDU) earlier this week, the parliamentary leader from her party accused Britain of "only defending its own interests" and announced triumphantly that "Europe is speaking German all of a sudden", a reference to widespread acceptance of German fiscal rigour across the bloc.
The comments sparked a strong reaction in the British press with the Daily Mail saying: "We no longer need to fear the jackboot but we have a great deal to fear from German bossy boots."
Germany's top-selling Bild newspaper retaliated, asking on the morning of Cameron's visit: "What is England still doing in the EU?"
** For the latest news on Europe's debt crisis, see (Reporting by Stephen Brown and Andreas Rinke; Writing by Noah Barkin; Editing by Jon Hemming)