Confirmation of the talks, however, sparked outrage in Germany, where opposition politicians threatened to derail the plans by voting against a key amendment to the bail-out fund this Thursday.
The head of Germany's constitutional court also piled on the pressure by warning the government not to circumvent the law "by the back door".
Despite the wrangling in Germany, markets across Europe staggered back to life on hopes that the crisis could be contained and the recovery restored.
In the UK, the FTSE 100 rose 0.4pc to 5,089.37 after £78bn was wiped off shares last week. In France, the CAC 40 rose 1.75pc, and Germany's DAX recovered almost 4pc.
Policymakers in Europe are working on a three-pronged plan to ringfence the euro crisis around Greece.
Under the proposal, banks across the continent would be recapitalised with tens of billions of euros, the €440bn European Financial Stability Facility (EFSF) would be "leveraged up" through the European Central Bank (ECB) to provide €2 trillion of firepower, and Greece would be subjected to a managed default on 50pc of its debt but stay in the euro.
Officials hope the move would restore confidence in Spain and Italy and calm nervous bond markets.
The developments follow mounting international pressure on Europe's leaders to fix their problems. President Barack Obama said last night that Europe's debt crisis "is scaring the world".
On Monday, EU economic affairs commissioner Olli Rehn, confirmed that the euro bloc is "thinking about giving the EFSF greater leverage, to give it greater strength".
German ministers also hinted at plans to leverage the EFSF, but stressed the fund itself would not be increased.
Chancellor Angela Merkel said the euro needed a firewall around Greece to stop the attacks on other European states.
Finance minister Wolfgang Schaeuble insisted the EFSF needed to be more "efficient", adding: "We are giving it the tools so it can work if necessary. Then we will use it effectively but we do not have the intention of boosting its volume."
Leveraging up the EFSF through the ECB, though, would not be without risk. Germany and France could both lose their AAA credit rating, a top official at Standard & Poor's warned.
David Beers, head of S&P's sovereign rating group, said: "There is some recognition in the eurozone that there is no cheap, risk-free leveraging options for the EFSF any more."
On Thursday, the German parliament is expected to vote through reforms to the EFSF agreed on July 21 to make it more flexible. However, the latest revelations have redoubled opposition efforts.
Social Democrat Carsten Schneider said the government should come clean on its "real intentions" and that "the parliament and public are having the wool pulled over their eyes".
His fears appeared to be confirmed by François Baroin, France's finance minister, who said last week that the reforms would allow the EFSF to conduct joint operations with the ECB.
Heaping more pressure on Chancellor Merkel, Andreas Vosskuhle, president of the German constitutional court, warned against further transfer of powers to Brussels. "If anyone wants to go beyond these boundaries, which may be politically justified, then Germany needs a new constitution. For that to occur, there must be a referendum," he said.
Separately, Spain today called a snap election for November 20. The government is seeking a mandate to push through unpopular reforms, with both parties committed to cuts. Greece also denied talk of an orderly default.
The Telegraph
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