(Bloomberg News) Europe's leaders have failed to convince investors that they are capable of solving Greece's debt crisis, running the risk of derailing the global recovery, the International Monetary Fund says.

"Despite adjustment efforts and support from euro-area member states and the European Central Bank, market participants remain unconvinced that a sustainable solution is at hand," the IMF board said in a statement released today on the 17-nation euro area. "These sovereign tensions constitute a key risk to the outlook with possible large regional and global implications."

European Union government chiefs plan to meet for the second time in a month on July 21, aiming to break a deadlock over a new Greek rescue that has spooked investors. Spanish and Italian bond yields surged yesterday, piling pressure on officials to end the turmoil. While Germany said it's confident the summit will produce an agreement, European leaders are at odds with one another and with the ECB over demands by Germany and Finland that private investors bear some of the burden of a new Greek bailout.

The IMF said leaders need to "scale up the capacity" of the area's rescue fund and make it more flexible.

"We would really advocate the crisis management facilities to allow interventions in secondary markets, provide guarantees, backstops for other fiscal agents and for banks if necessary," said Luc Everaert, division chief for Euro Area Policies in the IMF's European Department, in a conference call with reporters.

Everaert also said EU authorities must clarify their approach on private sector involvement and need stronger economic governance.

"We need fiscal disciple and it will be unavoidable to subordinate some fiscal sovereignty for the common good," Everaert said.

The IMF said there are potential "major global consequences" from the difficulties in the euro area, while the fund's staff sees "serious risks of contagion" in the euro region.