The Greek cabinet was expected to outline major public sector layoffs, more spending cuts and tax increases on Wednesday to secure a bailout instalment crucial to avoid running out of money next month.
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Greece is the front line in a euro zone sovereign debt crisis that also engulfed Ireland and Portugal and now threatens Italy, Spain and some of Europe's biggest banks, risking plunging the West back into recession.
Officials said European governments are looking seriously at steps to recapitalise banks most exposed to sovereign risk after initially rejecting an IMF call last month for urgent action.
Fears of another credit crunch or recession due to Europe's inability to overcome the debt crisis have dominated the run-up to this week's IMF/World Bank and Group of 20 meetings of finance chiefs in Washington.
A Greek government spokesman said austerity measures negotiated in tough talks with European Union and International Monetary Fund officials would be announced in the afternoon after a special cabinet session.
Finance Minister Evangelos Venizelos acknowledged before the meeting that Greece's public finances would have gone off the rails without checks by the so-called troika of EU/IMF inspectors, who walked out of Athens on Sept. 3 after uncovering a new deficit shortfall.
But he also said the EU had failed to manage the debt crisis as decisively and fast as required, and Greece was being blackmailed by the financial markets.
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"Do we need to take additional measures? Yes, we need to take additional measures," Venizelos told lawmakers, adding that the country needed the help of its international lenders, who have imposed a string of unpopular tax rises, pension cuts and economic reforms since they rescued the country in May 2010.
"If it weren't for the troika's control... unfortunately we would have derailed fiscally," he said.
Venizelos had a two-hour conference call late on Tuesday with senior troika officials, who pushed Greece to accelerate its austerity and reform drive to release an 8 billion euro loan disbursement next month, without which Athens will not be able to pay salaries, pensions and bills.
In a sign that a deal may be close, the European Commission announced after the call that troika mission chiefs would return to Athens early next week to complete their quarterly review of progress on Greece's adjustment programme.
Diplomats, economists and market analysts say Greece is likely to get the aid tranche, if only to buy time for European governments to recapitalise wobbly banks and strengthen the euro zone's rescue fund to cope with a default perhaps early next year.
A Finance Ministry official said Venizelos had agreed to bring forward measures from the so-called "mid-term plan," in which it has committed to slash its budget deficit through 2014 and sell some 50 billion euros in state assets.
Greek media reported the measures were likely to include accelerated sackings of state workers, pension and wage cuts for civil servants, increases in heating fuel tax and extension of a one-off property tax announced.
The government has so far said it will immediately put up to 3,000 public employees into a so-called labour reserve, in which they draw 60 percent of salary for a year while looking for another state job. Another 20,000 would follow in a second wave.
Those who do not find a job within 12 months would be dismissed. According to government estimates, putting people in the labour reserve saves about 12,000 euros per year per worker.
The measure is part of Greece's overall commitment to cut the civil service payroll by having 150,000 fewer civil servants less in 2015 than now -- about 20 percent of the total. The troika wants the layoffs speeded up.
IMF chief economist Olivier Blanchard said European countries were warming to the idea that banks in the region need to boost their capital to withstand potential losses from the sovereign debt crisis.
If banks needing more capital are unable to raise more on financial markets then public authorities might need to step in, although outright nationalisations are not necessary, Blanchard said in a French television interview late on Tuesday.
The IMF called for widespread bank recapitalisations in Europe in late August but met with stiff resistance from European governments.
However, Blanchard said he noted a clear change at a weekend meeting of EU finance ministers and central bankers in Poland.
"The position of most European countries is, yes, we have a problem, capital needs to be put into the banks," he told news channel France24. "It seems to me there's been a 180-degree change in a lot of countries."
EU finance ministers agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests as an EU report said a "systemic" crisis in sovereign debt now threatened a new credit crunch.
A Barclays Capital note said European banks could need some 230 billion euros to preserve a 6 percent core Tier 1 ratio in the extreme case of 50 percent haircuts on all sovereign debt of Greece, Ireland, Portugal, Italy and Spain, and the likely deep recession that would follow. The figure would be far smaller if only Greece were provisioned.
European banking shares have suffered steep falls in recent weeks over concerns about the sector's exposure to debt issued by Greece, with French banks suffering some of the biggest losses.
The head of Germany's number two lender, Commerzbank said the debt crisis was casting doubt on his bank's profit targets for this year, already softened last month.
"August was certainly not a happy month for a lot of banks," Commerzbank CEU Martin Blessing told Frankfurt business journalists.
Blessing said euro zone leaders had bought time by setting up the EFSF rescue fund but they had so far failed to find a path out of the crisis. Investors were awaiting reliable answers, he said.
"I believe we have reached a crossroads," Blessing said. If Europe wants to save the single currency, it must move toward a fiscal union.
"A monetary union without a fiscal union, this construct has failed," he said.