Speaking as European Union officials worked over the weekend on a huge rescue plan for Spain's feeble banks, Obama said the ongoing weakness in the eurozone was a concern for the US economy's own health.
But he was confident EU leaders appreciated the severity of a crisis that weighs heavily on his prospects of reelection in November.
"The leaders understand the seriousness of the situation and the urgent need to act," Obama told a press conference at the White House. "The decisions required are tough but Europe has the capacity to make them.
"And the sooner that they act and the more decisive and concrete their actions, the sooner people and markets will regain some confidence and the cheaper the costs of clean-up will be down the road."
Diplomatic sources told AFP that senior finance ministry officials from eurozone nations may hold weekend talks to prepare the nuts and bolts of a Spanish bailout should Madrid request help.
According to media reports, the International Monetary Fund has estimated the banks need some 40 billion euros ($50 billion) to stabilize, as markets increasingly cut Spain off from external private funding.
Obama said the steps needed to prevent further erosion of the situation were already known -- including quick action to stabilize Europe's banks.
"In the short term, they have got to stabilize their financial system. Part of that is taking clear action as soon as possible to inject capital into weak banks," he said.
"Just as important, leaders can lay out a framework and a vision for a stronger eurozone, including deeper collaboration on budgets and banking policy.
Obama meanwhile exhorted Europe to lighten up on extreme austerity programs -- the approach to the crisis pushed by Germany -- and give the troubled economies room to grow and generate jobs.
"Countries like Spain and Italy, for example, have embarked on some smart structural reforms that everybody thinks is necessary," he said.
"But they have got to have the time and space for those steps to succeed.
"And if they are just cutting and cutting and cutting, and their unemployment rate is going up and up and up, and people are pulling back further from spending money because they are feeling a lot of pressure, ironically that can actually make it harder for them to carry out some of these reforms."
He said that Europe's leaders were discussing a more flexible approach "to allow some of these reforms to really take root."
Obama's comments fed into the election battle heating up, with his Republican rivals blasting him for blaming Europe for his own failings on the US economy.
"Frankly, I'd ask the president to stop engaging in the blame game," said House of Representatives Majority Leader Eric Cantor.
"It's not because of the headwinds of Europe. It's not... because of House Republicans" that the economy is in a slump.
"It's because of the failed stimulus policies and other items in his agenda that small businesses in this country just aren't growing."
Just nine days before Greeks go to the polls for the second time in six weeks to vote on a new government, Obama urged them to take a path that will keep them inside the eurozone.
"It's in everybody's interest for Greece to remain in the eurozone while respecting its commitments to reform," he said.
"We recognize the sacrifices that the Greek people have made."
"But the Greek people also need to recognize that their hardships will likely be worse if they choose to exit from the eurozone."
Greece's voters remain deeply split over the issue.
Polls show nearly equal support for the leftist Syriza Party, which wants to tear up the EU-International Monetary Fund rescue program -- a move that could force a euro exit -- and the moderate New Democracy Party which is more committed to the EU-IMF austerity plan and the common currency.