Greece's international creditors gave Athens an ultimatum to come up with a credible reform plan on Thursday warning they would otherwise put their own proposals to euro zone finance ministers for approval, a euro zone official said.
The dramatic move came hours before European Union leaders meet in Brussels for a summit on migration, the long-term future of the euro zone and renegotiating Britain's membership terms, that has been overshadowed by the looming Greek debt crisis.
The official said the heads of the European Commission, the International Monetary Fund and the European Central Bank had given leftist Greek Prime Minister Alexis Tsipras until 0900 GMT to come up with a new, workable proposal of reforms to unlock new funding and avert a fast approaching debt default next week.
"If there is no deal by then, the institutions will send their own proposal to the Eurogroup," the official said.
Euro zone finance ministers, known as the Eurogroup, were to reconvene at 1130 GMT after cutting short a meeting on Wednesday evening because there was no draft agreement to discuss.
Diplomats said the lenders' tactics reflected exasperation at Tsipras's refusal to compromise on key reforms of pensions, labour markets, wages and taxation, which cross his Syriza party's self-declared "red lines".
Greek officials close to the talks argue that the government has already compromised on its red lines by offering to raise taxes and pension contributions. They say the lenders show a lack of will to do a deal by abruptly changing estimates of how much each measure they propose could raise, making it difficult to come up with an acceptable offer.
Without a cash-for-reform deal in the next 48 hours, the chances of Greece averting a default to the IMF look slim.
Failure to repay 1.6 billion euros owed to the IMF on Tuesday could trigger a bank run and capital controls, followed by a slide out of the single currency area.
"The lenders' demand to bring annihilating measures back to the table shows that the blackmail against Greece is reaching a climax," Nikos Filis, Syriza's parliamentary spokesman, told Mega TV.
He said the Greek side was maintaining its insistence on debt relief as part of any accord, in comments that were echoed by Labour Minister Panos Skourletis.
"There cannot be a deal without a substantial reference and specific steps on the issue of debt," Skourletis said in an interview with state broadcaster ERT.
Frustration was palpable on both sides, with one euro zone official describing the loss of trust in the Greeks as "extreme" and questioning whether an agreement was realistic given the intransigence from Athens.
In Frankfurt, a source familiar with ECB deliberations said powerful German Bundesbank chief Jens Weidmann had expressed fresh concern about the continued provision of emergency liquidity to keep Greek banks afloat despite deposit flight.
However, the ECB's governing council, which is now holding daily teleconferences on the situation, approved funding requested by the Greek central bank again on Thursday, a banking source in Athens said.
Positive signals earlier in the week, when the Greek government submitted a new list of proposals, mostly involving increases in tax and social security deductions, have given way to a growing belief that an accord is slipping away, although seasoned EU diplomats cautioned that the situation always seems most extreme just before a last-minute breakthrough.
Negotiators have been unable to produce an agreed draft text due to lingering differences over pension reform, taxation, labour law, public sector wages, the opening of closed professions, and investment.
Complicating matters, any deal would have to be endorsed by Greek lawmakers, followed by votes in several European parliaments, including the German Bundestag, where MPs have been told to prepare for a session on Tuesday.
Markets on edge
Asian stocks edged down on Thursday as investors, who cheered signs of progress earlier in the week, reverted to cautious mode ahead of a summit of European Union leaders in Brussels starting later in the day.
"Optimism around a Greek deal had been driving price action all week but a stall in the negotiation process has put the brakes on the rally," IG market strategist Stan Shamu wrote.
Among the most crucial unresolved issues are Greek demands for debt restructuring, differences over reforming Greece's costly pensions system and Athens' focus on tax hikes versus spending cuts.
The latest Greek proposals, made in a five-page document on Monday, featured a series of tax rises on consumption, businesses and the wealthy, as well as higher contributions to pensions to meet budget targets.
"You can't build a programme just on the promise of improved tax collection, as we have heard for the past five years with very little result," IMF chief Lagarde told French magazine Challenges on Wednesday.
One Greek official said the lenders sent back documents, full of crossings-out and underlining in red ink, rehashed their previous offer and took scant account of Athens' proposals.
The more concessions Tsipras makes, the more resistance he will face in parliament within his coalition and on the streets, where recent protests, some organised with Syriza's support, have underlined opposition to yet more belt-tightening.
"Lenders are opposing a tax on e-gambling but want a 23 percent VAT tax on milk. Are they doing this for growth or (to serve) interests?" Dimitris Papadimoulis, a Syriza lawmaker at the European parliament, tweeted on Thursday morning.
"The lenders' hard core faction does not want a deal but a rift, Greece's humiliation and the fall of the Tsipras government. It won't get its way."