David Cameron, addressing Canada's MPs, warns European governments they must deal with the financial crisis Reuters

The global economy is close to "staring down the barrel" and is threatened by the failure of eurozone leaders to agree a lasting settlement to stabilise the single currency, David Cameron warned on Thursday night.

As markets tumbled around the world, amid gloomy assessments from the IMF and the World Bank, the prime minister issued his gravest warning about the global economic outlook and bluntly told eurozone leaders to stop "kicking the can down the road". "We are not quite staring down the barrel but the pattern is clear," the prime minister told the Canadian parliament in Ottawa.

"The recovery out of the recession for the advanced economies will be difficult. Growth in Europe has stalled, growth in America has stalled. The effect of the Japanese earthquake, high oil and fuel prices is creating a drag on growth. But fundamentally we are still facing the aftermath of the world financial bust and economic collapse in 2008."

Cameron's speech came as Christine Lagarde, the managing director of the International Monetary Fund, warned world leaders that "time is of the essence" as investors took fright at politicians' failure to tackle sickly global growth and the spiralling eurozone debt crisis.

As Cameron spoke, the FTSE 100 index tumbled 246 points, or 4.67%, to close at 5041 – the blue-chip index's worst daily fall in percentage terms since March 2009. On Wall Street, the Dow Jones index closed 3.5% down at 10773 points, while share prices in France and Germany also dropped sharply.

The prime minister identified one of the main problems as the failure of eurozone leaders to agree a "lasting solution" to stabilise the single currency.

"The problems in the eurozone are now so big that they have begun to threaten the stability of the world economy," Cameron said. "Eurozone countries must act swiftly to resolve the crisis. They must implement what they have agreed and they must demonstrate they have the political will to do what is necessary to ensure the stability of the system. One way or another, they have to find a fundamental and lasting solution to the heart of the problem – the high level of indebtedness in many euro countries."

In an interview with Channel 4 News, the prime minister used blunter language to call for eurozone leaders to offer stronger political backing for the €440bn (£386bn) bailout mechanism, known as the European Financial Stability Facility. In a message to the 17 eurozone leaders, he said: "We cannot go on kicking the can down the road. We need decisive action, swift action to deal with this issue."

The prime minister showed how Britain is beginning to distance itself from its EU partners by signing a letter with five other world leaders outside Europe calling on eurozone leaders to "act swiftly". The letter to the French president, Nicolas Sarkozy, in his capacity as president of the G20, says: "We have not yet mastered the challenges of the crisis."

The letter, designed to help shape the agenda at the next G20 meeting in Cannes in November, is likely to be seen as a major departure in British diplomacy, which has been anchored in the EU for the past four decades. It is unprecedented for a British prime minister to join forces with two other Commonwealth leaders – Canada's Stephen Harper and Australia's Julia Gillard – and three other leaders from outside the EU to issue a warning to the main EU member states.

The prime minister's language shows Britain's deep frustration with the failure of eurozone leaders to grapple with the crisis in the single currency. Cameron wants action in two areas: greater political will behind the eurozone bailout mechanism, and moves towards greater fiscal integration in the eurozone, though not in the rest of the EU, in the medium to long term.

"The remorseless logic of economic and monetary union is fiscal integration," a British source said.

In his Ottawa speech the prime minister also echoed the IMF's calls for Europe's banks to be strengthened and added that euro countries should reform their labour markets. "Whatever course they take, Europe's banks need to be made strong enough so that they can help support the recovery, not put it at risk," Cameron said. "At the same time, we cannot put off the fundamental problem of the lack of competitiveness in many euro-area countries.

"Endlessly putting off what has to be done doesn't help, in fact it makes the problem worse, lengthening the shadow of uncertainty that looms over the world economy."

The letter to Sarkozy was initially interpreted as a warning to Barack Obama, who recently outlined a $440bn (£287bn) jobs package for the US. British officials rejected this interpretation because the Obama plan is fiscally neutral and because the letter was carefully balanced.

The latest sell-off in the world's financial markets came after a key manufacturing survey in China suggested its economy is faltering, and the Federal Reserve's latest emergency measure, Operation Twist, failed to calm markets.

G20 finance ministers will discuss the darkening economic outlook on Friday in Washington on the fringes of the IMF's annual meeting.

Lagarde told reporters in Washington that "our actions, our analysis and our proposed policy mix is not dictated by the day-to-day variations of the Dow Jones, the Nasdaq, the Cac or the Dax".

But she called on Europe and the US to rediscover the spirit of the London G20 conference at the depths of the financial crisis in 2009, when leaders promised to boost the IMF's resources, bail out banks and avoid tit-for-tat protectionism.

Lagarde said the priority must be "implementation, implementation, implementation", but she conceded that politicians now had less scope for action than three years ago in the wake of the collapse of Lehman Brothers.

"In 2008, there was a much wider path for recovery, because the sovereigns had more room for manoeuvre. They incredibly ably managed to avoid protectionism, to kick-start growth, and to make sure than the financial pipes that fuel the economy worked again."

In Greece the government announced a fresh round of austerity measures on Tuesday, including pension cuts and tax rises for low earners, in an attempt to persuade its creditors, including the IMF, to release the latest €8bn tranche of rescue funds. But many investors now believe default for the debt-burdened state is inevitable.

The Federal Reserve chairman, Ben Bernanke, had hoped to soothe investors' fears on Wednesday by announcing Operation Twist, aimed at driving down long-term interest rates and boosting the ailing American housing market. But share prices around the world plunged after the announcement as investors became fixated instead on the Fed's warning that the economy faced "significant downside risks".