EUROPE must act to stabilise the Greek debt crisis before it engulfs the continent and leads to a second global meltdown.

The warning came from John Lipsky, acting head of the International Monetary Fund (IMF), as EU finance ministers refused to hand Greece a second bailout package of £11 billion unless it agreed to implement a £25bn round of austerity measures – including more tax increases and spending cuts – by July 3.

The delay sent a chill through the financial markets with the euro losing ground against the dollar. Bank shares tumbled.

The financial dilemma is marked by two different views of the way forward: one believes it is time for Greece to leave the euro with no more EU bailout money; the other believes such a move would spread contagion to struggling economies such as Ireland and Portugal and then, domino-style, to the banks.

In the Commons, Jack Straw, the former Labour Foreign Secretary, said the euro was heading for collapse because of the Greek crisis and that a quick death might be preferable to a slow one. He is the most senior UK politician to say the eurozone “cannot last” and urged ministers to prepare Britain for “alternatives” to the European single currency.

In Athens, Greek MPs debated more austerity plans as demonstrators, who have seen their pay and pensions slashed, gathered outside the parliament. George Papandreou’s Government faces a vote of confidence today.

As EU finance ministers grappled with the details of a second bailout for Greece, the IMF delivered its bluntest warning yet, saying: “Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers.

“A disorderly outcome cannot be excluded.”

Following the finance ministers’ meeting, Mr Lipsky warned the Greek crisis would “be felt much more strongly around the world” if it were allowed to draw in core eurozone banks.

Downing Street made clear that a proposal for Britain to contribute towards a second bailout was “not on the table”; any lifeline is expected to involve only the 17 eurozone members.

However, Treasury Minister Mark Hoban told MPs the burden of supporting Greece might have to be shared by the IMF, of which the UK is a major shareholder with a total subscription of £20 billion. He was answering a question from eurosceptic Labour MP Gisela Stuart, who argued the UK would not be able to isolate itself from the consequences of a Greek default and that a financial crisis “comparable to Lehman Brothers” could break up the eurozone.

Mr Straw estimated Britain’s potential exposure to Greek debt, including that of private banks, totalled £8 billion. He added: “If this euro in its current form is going to collapse, is it not better it happens quickly rather than a slow death?”

But Mr Hoban insisted British banks’ exposure to Greek debt stood at just under £2.5 billion, lower than that of French or German banks.

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