France and Germany are proposing a €500bn ($545bn; £448bn) European recovery fund to be distributed to EU countries worst affected by Covid-19.

In talks on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants.

The proposal represents a significant shift in Mrs Merkel's position.

Mr Macron said it was a major step forward and was "what the eurozone needs to remain united".

"I believe this is a very deep transformation and that's what the European Union and the single market needed to remain coherent," Mr Macron said following discussions via video link.

Mrs Merkel, who had previously rejected the idea of nations sharing debt, said the European Commission would raise money for the fund by borrowing on the markets, which would be repaid gradually from the EU's overall budget.

Grants provided by the proposed recovery fund should also be used to help finance the bloc's investment in a greener future, the two leaders said.

European Commission President Ursula von der Leyen said the proposal "acknowledges the scope and the size of the economic challenge that Europe faces".

European Central Bank (ECB) President Christine Lagarde said the plan was "ambitious, targeted and welcome".

Other EU countries must agree with the proposal, however, and Austrian Chancellor Sebastian Kurz later insisted that his country backed providing loans to member nations hit hard by the coronavirus pandemic, rather than grants.

"Our position remains unchanged," Mr Kurz wrote in a tweet, adding: "We expect the updated [EU budget] to reflect the new priorities rather than raising the ceiling."