Fears of a domino effect increased after credit rating agency Standard & Poor's downgraded Spain's debt rating on Wednesday by one notch from AA+ to AA, just a day after Greece had its rating downgraded to BB+ or "junk" status.
Standard & Poor's, which also marked down Portugal's debt status on Tuesday, said Wednesday's move on Spain was due to expectation that the country will suffer an "extended" period of subdued economic growth.
Axel Weber, the president of the German central bank and a European Central Bank Governing Council member, said that the cost of a debt default by Greece would be "incalculable".
"In the current situation, the impact on financial markets and other states would be incalculable," Weber said.
Strauss-Kahn said that confidence in all the countries using the euro currency was on the line.
"It is the confidence in the whole [euro]zone that is at stake," he said.
Asian markets appeared to stabilise on Thursday after a day of volatility in European markets as investors sought assurances that Germany would come to Athens' aid to keep its financial troubles from spreading to other countries.
Merkel met Strauss-Kahn and Jean-Claude Trichet, the European Central Bank president, in Berlin on Wednesday and said she hoped "accelerated" negotiations between all parties, including the Greek government, could "be wrapped up in the coming days".
The German leader also spoke with Barack Obama, the US president, by phone.
"They discussed the importance of resolute action by Greece and timely support from the IMF and Europe to address Greece's economic difficulties," the White House said.
Investors fear delays in a rescue package could result in Greece being unable to avoid defaulting on $12bn in bond payments on May 19.
The IMF now says a rescue package for Greece may total $159bn over three years.
Wolfgang Schaeuble, Germany's finance minister, said legislation to free up his country's contribution to a rescue package could get through both houses of parliament as early as May 7 if Greece wraps up its ongoing talks with the IMF and the European Union quickly enough.
Protecting the euro
Guido Westerwelle, Germany's foreign minister, echoed that commitment, saying Berlin was ready to act quickly in order to protect the euro.
|Investors fear Greece will default on a $12bn payment if a rescue is delayed [GALLO/GETTY]
"We will protect our currency and this is in the deepest interest of every European citizen," he said.
Nicholas Skourias, chief investment officer at Pegasus Securities in Athens, said there was "a very serious risk of contagion".
"It's something like post-Lehman period - everybody is panicking and there is a lot of fear in the market," he said.
Speaking during a cabinet meeting on Wednesday, George Papandreou, the Greek prime minister, said that every EU member must "prevent the fire that intensified through the international crisis from spreading to the entire European and global economy".
Insisting Greece was determined to take its economy in hand, he said: "We will show that we do not run away. In difficult times we can perform, and we are performing, miracles.
"Our government is determined to correct a course that has been followed for decades in a very short time."