IMF said that attempts to stabilise the region's economy and banks had so far failed and a determined move towards a more complete banking and fiscal union was necessary to protect the future of the single currency.
The eurozone is in "critical" danger and the European Central Bank must do more to drag it from the depths of the crisis, the International Monetary Fund (IMF) has warned.
The Fund said that attempts to stabilise the region's economy and banks had so far failed and a determined move towards a more complete banking and fiscal union was necessary to protect the future of the single currency.
"The immediate priority for the eurozone is to establish a banking union and move toward more fiscal integration," said Mahmood Pradhan, mission chief for the eurozone.
"These moves would help stem the decline in confidence engulfing the region, lower borrowing costs for countries facing severe market pressure, break the downward spiral between sovereigns and banks, and reduce the risk of contagion across the euro area."
The IMF staff report said that a clear timetable for action should be laid out, to restore faith and credibility in member states.
It said the ECB must play a bigger role in attempts to preserve the monetary union by lowering borrowing rates and deploying further "unconventional measures" to relieve severe market stress.
A banking union would include a European-wide deposit guarantee scheme, with an ECB credit line in emergencies, and a greater regulatory role for the central bank.
The IMF's blueprint to save the euro is likely to anger German policymakers, who are strongly opposed to the idea of pooling bank and sovereign debt, and reject the idea that the ECB should take on a "lender of last resort" role.
The IMF is forecasting a 0.3% contraction in the eurozone's economy this year, followed by 0.7% growth in 2013. "With many of these headwinds significantly stronger in the periphery, growth is expected to be much lower there than in the core. Germany and France are expected to post weak but positive growth in 2012."
The eurozone crisis is already taking its toll on the global economy and Tim Geithner, the US Treasury Secretary, said yesterday that "trauma" in the region was slowing the US economy and posed the greatest risk to growth.
Meanwhile, Nouriel Roubini, the economist who famously predicted the financial crisis, said that the global economy could be on course for a "perfect storm" next year.
Roubini, the New York University professor who was dubbed "Dr Doom", said a number of unpleasant factors could combine to derail the global economy in 2013, including an escalation of the eurozone crisis.
Other factors, he said, included further tax increases and spending cuts in the US that might drive the world's largest economy into recession; a hard landing for China's economy; a further slowdown in emerging markets; and war with Iran.
"Next year is the time when the can becomes too big to kick it down [the road]?… then we have a global perfect storm. That could happen," he said.
Following a flat year this year, he said US markets could be in store for sharp falls next year, with the Federal Reserve powerless to stop them.
"If the economy is weakening, that is going to put downward pressure on earnings growth," he said.
Roubini said the Federal Reserve was likely to look increasingly to unconventional measures to ease the crisis as the impact of quantitative easing diminished over time.
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