European Union economic and monetary affairs commissioner Olli Rehn said Greece and its private-sector creditors are "very close" to a debt-swap agreement.

Mr Rehn said the "building blocks are there" for a deal and that it would be better to conclude the agreement this month rather than next.

The news came as Standard & Poor's warned it will likely downgrade Greece's ratings to "selective default" when the country concludes its debt restructuring.

European governments have sought to fill a deeper-than-expected hole in Greece's finances by saddling investors with a lower interest rate on exchanged bonds, setting up a confrontation in the runup to the EU summit next week.

Finance chiefs refused to increase an offer of €130 billion in public funds for a second Greek program. Instead, they rebuffed investors' bid for an average 4 per cent interest rate on new Greek bonds, seeking coupons below 3.5 per cent for debt to be serviced until 2020 and below 4 per cent over the 30 years of the next Greek package.

The aim of the restructuring is to reduce Greece's debts by around €100 billion, cutting them from 160 per cent of gross domestic product to 120 per cent by 2020, a level EU and IMF officials think will be more manageable for the Greek economy.

The disagreement increases the risk that it will prove impossible to strike a voluntary restructuring deal between Greece's creditors and the Greek government - an outcome that would have severe repercussions for financial markets.

Negotiations over what's called 'private sector involvement' (PSI) have been going on for nearly seven months without a concrete breakthrough. Failure to reach a deal by March, when Athens must repay €14.5 billion of maturing debt, could result in a disorderly default.

"I believe everyone has now realised that Greece must be supported in its effort, which is of vital importance not only for us but for the euro zone as a whole and the global economy," said Greek finance minister Evangelos Venizelos.

Managing director of the International Institute of Finance Charles Dallara, who is negotiating a voluntary debt swap with Greece on behalf of bondholders, said it's important to resolve the situation in Greece cooperatively.

"It's important to all parties to recognise how much we have at stake here and that we work together cooperatively," he said at a press conference in Zurich.

S&P's warning over Greece's rating was a blow, but the agency said it would not necessarily destroy the credibility of the European Union.

"It's not a given that Greece's default would have a domino effect in the euro zone," John Chambers, the chairman of S&P's sovereign rating committee.

German finance minister Wolfgang Schauble today warned that all Greek parties must commit to reforms agreed with international lenders, no matter who wins upcoming elections, or Athens puts at risk the second bailout programme.

The country is due to hold snap elections, and its co-ruling conservative New Democracy party said today it wanted the vote by April 8th.

"Greece must implement the agreed measures and reforms. And of course all Greek parties must agree to the measures and a new programme, independently of the upcoming elections," Mr Schäuble told reporters in Brussels.

As well as assessing Greece's debt restructuring, euro zone ministers have also been discussing efforts to enforce stricter budget rules for EU states via a "fiscal compact", and steps to finalise the structure of a permanent euro zone bailout fund, the European Stability Mechanism (ESM), which is due to operate from July.

Ministers meeting in Brussels agreed to use unanimous voting in the 17-country currency region for decisions entailing an increase in member states' contributions to the European Stability Mechanism.

German chancellor Angela Merkel's conservative allies have warned against committing additional German funds to euro zone bailout schemes.

Germany has insisted that once the ESM is up and running, the combined potential outlay of the EFSF and ESM should not exceed €500 billion.

Italian prime minister Mario Monti and IMF chief Christine Lagarde have said the ceiling should be raised, possibly up to €1 trillion, so it has more than enough capacity to handle any problems in major economies such as Spain or Italy.

Agencies