European Union governments will spend the next six weeks building a financial firewall to protect their fragile banking systems against what is now seen as an inevitable Greek default.

G20 sources said that up to 50% was likely to be wiped from the face value of Greece's €350bn debt – but not until Europe had put into place a war chest to prevent the contagion spreading.

More money will be disbursed by the International Monetary Fund and the EU next month to keep the Greek government afloat, but this is seen as a short-term fix while Europe's leaders beef up the eurozone bailout fund, the European Financial Stability Facility.

Europe came under ferocious pressure at this weekend's IMF meeting in Washington to contain the spiralling crisis, which is blamed for dragging the global economy to the brink of a double-dip recession. The IMF is reportedly willing to continue bailing out Greece in the short-term, provided that Europe uses the time to tackle the issue of debt once and for all. The Washington-based lender believes the 18-month delay since Greece was first bailed out last spring has exacerbated the crisis.

Tim Geithner, the US treasury secretary, said: "The threat of cascading default, bank runs and catastrophic risk must be taken off the table, otherwise it will undermine all other efforts, both within Europe and globally.

"Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."

Officials attending this weekend's meetings suggested that the EFSF may have to be boosted to up to £1.7 trillion, almost five times its current size, to convince markets that it could contain the destabilising impact of a Greek default. Instead of European governments being forced to pour in cash up front, Geithner and others are calling for the EFSF to be allowed to underpin the operations of the ECB, by guaranteeing to bear part of any losses it is forced to take on sovereign bonds. That could massively boost the ECB's buying power and help it to damp down the crisis in the event of a Greek default.

The US and Britain believe that Europe needs to deploy massive firepower to prevent a domino effect from Greece bringing down the other vulnerable members of the eurozone such as Portugal, Italy and Spain. However, ministers are reluctant to admit publicly that a Greek default is inevitable. George Osborne said in Washington: "No one here has put forward a plan for that; Greece has got a programme and needs to implement it."

A communiqué from the finance ministers and central bankers of the IMF's member states, released after Saturday's meetings, reiterated the need for urgent action from the eurozone and set a deadline of mid-October to reform the bailout fund.

"Euro-area countries will do whatever is necessary to resolve the euro-area sovereign debt crisis and ensure the financial stability of the euro area as a whole and its member states," it said.