Antonio Borges, the head of the IMF's Europe program, said the eurozone's bailout fund should get more firepower and new tools.
To help, he said the IMF could intervene in bond markets to keep the crisis from engulfing large economies like Italy and Spain. The surprise proposal would profoundly alter the fund's role in the crisis.
It has so far contributed close to €80 billion ($105 billion) to eurozone bailouts, about a third of the total, but never intervened in open markets.
"We have a whole set of options that could be put on the table to restore confidence in those countries," Borges said at a news conference in Brussels.
His comments are the first open acknowledgment of a radical change in approach by the IMF to the eurozone's debt crisis. The currency union's debt troubles have intensified severely as most investors expect a default by Greece and fear much larger Italy and Spain will be dragged into the crisis.
In public statements until now, IMF officials had insisted on agreements made at a eurozone summit in July, which gave a first range of new powers to the region's bailout fund and tentatively offered a second, €109 billion bailout for Greece, with modest losses accepted by banks on their Greek investments.
But Borges made clear on Wednesday that those decisions were no longer sufficient.
He said that the €109 billion figure was an estimate based on conditions that have since changed, adding that a new program needed bigger focus on Greece's massive debt and growth. He said that didn't necessarily entail bigger losses for banks and other private Greek bond holders.
Borges also piled pressure on Greece to take more stringent measures to get its economy back on track, saying there was no rush to take a decision on the payment on the next slice of bailout money because the country doesn't face a big bond repayment deadline until December.
Athens has said it will start running out of money to pay salaries and pensions in mid-November if it doesn't get the €8 billion ($11 billion) installment of its first €110 billion ($145 billion) bailout.
The increasing uncertainty over Greece's fate have increased market volatility and destabilizing the banking sector. Belgium and France are fighting for the survival of Dexia, the first potential failure of a big European bank since the credit crunch of 2008.
To build confidence, Borges backed a push to boost the impact of the eurozone's bailout fund by using its resources more creatively.
In a new report on Europe released at the same time as the press conference, the IMF said the eurozone should consider using its crisis tools to guarantee bond issues from struggling countries. It also said eurozone countries should commit to indemnify the European Central Bank against possible losses on purchases of shaky government bonds it has made so far.
Both these moves have been discussed as part of a plan to bolster the effectiveness of the €440 billion ($580 billion) bailout fund, the European Financial Stability Facility.
Borges said the IMF is ready to help Europe support struggling Italy and Spain as soon as all countries have ratified the changes to the EFSF agreed in July.
For instance, the IMF could help the eurozone's bailout fund to support the distressed bond markets in Italy and Spain by buying their bonds on the open market alongside the EFSF. The fund could also give the two countries precautionary credit lines, he added.
He said Europe needs to take co-ordinated action on its banks to restore confidence in the financial sector. The IMF has previously said that it may cost as much as €200 billion to recapitalize lenders across the continent.
"We are not saying that banks are in trouble and we are not saying that banks are weak," Borges said, but he stressed that there was a big crisis of confidence that could only be addressed through action at European level.
In its report, the IMF says the EFSF should be empowered to directly recapitalize banks.