US Treasury Secretary Timothy F. Geithner demanded European policy makers intensify efforts to neuter their 18-month sovereign debt crisis or trigger the "threat of cascading default, bank runs and catastrophic risk."

In his strongest public call yet for Europe to step up its crisis-fighting, Mr Geithner said strains in the euro-area's budgets and banks are the "most serious risk now confronting the world economy" and urged authorities to immediately "create a firewall against further contagion."

Mr Geithner's call - made in a statement today at the annual meetings of the International Monetary Fund in Washington - came at the end of a week in which equities entered their first bear market in two years.

The slide partly reflected mounting worries among

investors that Greece is on the brink of default and Europe's repeated failure to stop the crisis from spreading may cause another global recession.

Mr Geithner also said that the IMF is still falling short in assessing exchange rate policies and should itself be subject to more scrutiny.

"The Fund's surveillance would benefit from the publication of an External Stability Report that provides a frank assessment of exchange rate misalignment and excessive reserves accumulation and progress being made in reducing global imbalances," he said.

"We call on the IMF to set forth a strong and comprehensive set of proposals to address these deficiencies."

European Governments are expected to move, possibly as soon as this weekend, to provide fresh support for their banks as expectation intensifies that Greece may soon default on its sovereign debt.

The French government was yesterday said to be seeking new capital for its besieged banks from Middle Eastern investors and may also seek funds from the European Financial Stability Fund (EFSF) set up to raise funds for Greece, Portugal and Ireland.

Up to 20 European banks need additional funds, according to the French financial authorities.

Irish Government sources said last night they would hope to take advantage of any move to tap the EFSF to reduce the €70 billion cost of rescuing the Irish banks which are not expected to require more capital in the event of a Greek default.

The International Monetary Fund has been pushing aggressively for bank recapitalisations in Europe after it concluded that their exposure to the debt crisis now stands at €300 billion. This is in addition to the €420 billion that European banks have already received since 2008.

Finance ministers and central bankers from around the world, in Washington for twice-yearly policy discussions, have pressed for Europe to do more to prevent Greece’s debt crisis infecting the world economy.

“They have six weeks to resolve this crisis,” warned British chancellor George Osborne.

Europe’s response was taking shape last night. As well as bank recapitalisation it will involve the European Central Bank providing longer-term emergency loans to euro zone banks by reviving a one-year liquidity scheme used between 2007 and 2009.

In a break with ECB practice, a member of its governing council acknowledged the possibility of a Greek default for the first time.

Indications that the ECB will use its firepower to boost banks spurred a rally in world stock markets, which had fallen to their lowest level for 14 months, amid concern about the debt crisis and the worsening outlook for the US economy.

“It is one of the scenarios. I’m not saying that Greece will not go bankrupt,” Dutch central bank governor Klaas Knot said in a newspaper interview.

“All efforts are aimed at preventing this, but I am now less certain in excluding a bankruptcy than I was a few months ago.”

However, an ECB source said the bank’s position remained the same.

“For us nothing has changed. The Greeks have to stick to their commitments and the governments have to implement their July 21st decision. There is no such thing as an orderly default,” the source said.

Mr Knot’s remarks came as Greek finance minister Evangelos Venizelos tried to play down resurgent default talk in Athens.

Two Greek papers reported that Mr Venizelos has told MPs in his party that imposing a 50 per cent loss on the country’s debt may be a way out of its financial crisis.

In a statement yesterday, the minister insisted Greece was doing all in its power to stick with its rescue plan.

“All other discussions, rumours, comments and scenarios that distract attention from this central goal and political obligation of Greece and of all the other euro area member states and European institutions, do not offer good service towards our common European case.”

In Brussels, a European Commission spokesman told reporters that recapitalisation was “something that is already happening”.

Additional reporting: Bloomberg/Reuters