By Ambrose Evans-Pritchard

LONDON, England - April 21, 2010 - The International Monetary Fund has warned that Greece’s debt crisis risks spinning out of control, threatening to spill over across the region unless action is taken soon to restore confidence.

"In the near term, the main risk is that - if left unchecked - market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis," said the Fund in its World Economic Outlook.

Bundesbank chief Axel Weber echoed the concerns, saying the financial system was still very fragile and subject to a "significant risk of contagion effects. A possible default by Greece would most likely be a severe economic blow for other countries in monetary union".

Debt markets are already under severe stress. Spreads on 10-year Greek bonds jumped on Wednesday to a post-EMU high of 529 basis points above German Bunds, pushing borrowing costs to over 8.3%. The Greek daily Kathimerini said the government was out of its depth and appeared to be in a state of "nervous exhaustion".