Greece last year won a 110 billion euro ($157.5 billion) rescue package from the EU and International Monetary Fund, but since then has struggled to meet its deficit reduction targets, heightening the risk of a default on its 327 billion euro debt -- equivalent to 150 percent of economic output.

European Central Bank board member Lorenzo Bini Smaghi issued a dire warning against default and told the Financial Times it was a "fairytale" to think that Greece's debts could be restructured in an orderly way.

"If you look at financial markets, every time there is mention of a word like 'restructuring' or 'soft restructuring' they go crazy - which proves that this could not happen in an orderly way, in this environment at least," he said.

He added: "If Greece defaulted, the Greek banking system would collapse. It would then need a huge recapitalization -- but where would the money come from?"

The Italian said Greece could instead reduce its debt by selling assets and changing its tax and expenditure systems. "If you look at the balance sheet of Greece, it is not insolvent."

But Socialist Prime Minister George Papandreou has failed to win backing from the opposition to adopt fresh austerity steps, more economic reforms and faster sales of state assets, as demanded by the EU and IMF.

"IMF SHOULD GET OUT"

Tens of thousands of protesters packed a central Athens square on Sunday to denounce the nation's entire ruling class and vent their anger at the IMF and its demands for yet more belt-tightening.

Black-hooded youths have been battling police since the austerity drive began last year, but the demonstrators who took over Syntagma Square, in front of parliament, were families, from children to the elderly, who had no class wars to wage. Read More