Leading banks are at loggerheads with European leaders after lenders offered to accept losses of up to 40% on their Greek debt holdings, a proposal seen as insufficient by politicians.
The offer - an increase on the banks' previous proposal of a 21% 'haircut' - is set to trigger a tense period of negotiations and could determine the success of a crucial European summit on Wednesday.
The IMF is thought to be calling for a 60% haircut while Europe's leaders are demanding at least 50%, but bankers have warned that anything over 40% risks setting off a 'credit event', triggering credit default swaps.
As feared, politicians were unable to agree definitive moves to halt the crisis at talks in Brussels this weekend.
Politicians have all but finalised a €100bn bail-out of European banks as one part of plans to put the region back on a stable footing but remain at odds over details governing the European Financial Stability Facility (EFSF), the €440bn sovereign bail-out fund.
In a victory for Germany, leaders agreed that the European Central Bank would not play a role in boosting the EFSF's firepower. The agreement, a blow for France which had been hoping to use the ECB to lend potentially limitless funds, will raise further questions as to how politicians will boost the EFSF's strength. The focus appears now to rest on the EFSF being used to guarantee government bond sales.
"Work is going well on the banks, and on the fund and the possibilities of using the fund, the options are converging," claimed French President Nicolas Sarkozy. "On the question of Greece, things are moving along. We're not there yet."
A blueprint for how to solve the crisis will not now be released until after the summit this Wednesday, the latest delay in the political response to the crisis. The bank recapitalisation is expected to be met by the banks themselves where possible, with governments and the EFSF only stepping in as a last resort.
In a further sign of the tensions between Europe's heavyweight nations, Italian leader Silvio Berlusconi was called to a meeting with Mr Sakozy and German chancellor Angela Merkel ahead of yesterday's summit.
After what Ms Merkel called a "conversation among friends", the German leader said "confidence won't result merely from a firewall", calling on Italy to reduce its debt levels in a "credible way" in order to be eligible for help.