Europe reeled Monday from warnings it faces a "deep depression" if the eurozone collapses and that every EU nation's credit rating could be hit without firm action to stop the debt crisis.
An updated growth report from the OECD said the crisis was now just one step away from plunging advanced economies into an abysss of recession and could trigger waves of bankruptcies.
Moody's, one of the three main ratings agencies, warned even countries such as Germany may have to have their credit status revised -- a move which would force them to pay higher borrowing costs.
Italy, the focus of warnings from Germany and France that if it cannot dominate its debt problem it will wreck the eurozone, struggled to raise funds on the bond market.
And while Belgium managed to raise 2.0 billion euros ($2.68 billion) in a bond auction, it had to agree to investor demands for a 5.65 percent return for benchmark 10-year bonds compared to 4.37 percent less than a month ago.
Despite the glut of bad news, stocks rose after reports that the International Monetary Fund was readying a bailout for Italy.
By mid-afternoon London's FTSE 100 was up more than three percent, while Frankfurt, Paris and Milan saw rises of over four percent. In New York, the Dow Jones Industrial Average gained 2.52 percent at opening.
The IMF however denied that talks on any such deal were taking place.
The report by the Organisation for Economic Cooperation and Development made grim reading as it forecast the United States faced a period of slow growth, Japan's economy would shrink 0.3 percent this year and developing nations would also see a slowdown.
But its starkest warning was reserved for the 17-nation eurozone which it said was set for growth of 1.6 percent and next year just 0.2 percent.
The OECD said there was still time for decisive action by policymakers to avert a far worse outlook, urging the European Central Bank to buy up devalued government debt bonds in huge quantities.
That advice flies in the face of an insistence by Germany which has so far rejected extra bond purchases, arguing the priority is for countries in trouble to reform their economies.
It spoke openly about the possibility of a eurozone break-up, saying an exit by one or more countries "would most likely result in a deep depression in both the exiting and remaining euro area countries as well as in the world economy.
"The euro area crisis represents the key risk to the world economy at present," the OECD said. "A large negative event would ... most likely send the OECD area as a whole into recession."
Moody's also evoked the prospect of the eurozone fragmenting, saying "the probability of multiple defaults ... is no longer negligible" and that would "significantly increase" the likelihood of one or more members dumping the currency.
"Moody's believes that any multiple-exit scenario -- in other words, a fragmentation of the euro -- would have negative repercussions for the credit standing of all euro area and EU sovereigns," the agency added.
"The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns."
The European Union's three biggest economies -- Germany, France and Britain -- have so far maintained their triple A credit rating
But countries such as Italy, Spain, Greece, Ireland, Portugal and most recently Belgium have all suffered rating downgrades that have accelerated unsustainable rises in their borrowing costs over the past two years.
A weekend report in Italy's La Stampa newspaper had said the IMF was readying a bailout package worth up to 600 billion euros, giving new Prime Minister Mario Monti a window of 12 to 18 months to implement budget cuts.
Greece, Portugal and Ireland have all received bailouts but a rescue of Italy, the eurozone's third-biggest economy, would be on a totally different scale.
Italy's 1.9-trillion euro public debt and low growth rate have spooked the markets in recent weeks.
La Stampa said the IMF would guarantee rates of 4.0 percent or 5.0 percent on the loan -- far better than the borrowing costs on commercial markets.
The IMF denied any such talks, issuing a statement that "there are no discussions with the Italian authorities on a programme for IMF financing".
But analysts said the markets were unconvinced by the denial and sentiment was also given a lift by a report that German Chancellor Angela Merkel and French President Nicolas Sarkozy are considering a new stability treaty that would be limited to only a few eurozone countries.
However Jean-Claude Juncker, head of the eurozone finance ministers group, rejected any solutions that would divide the EU.
"It is not good to artificially divide the EU into two groups," he told reporters. "It is important not to create differences between the 27 (EU members) and the 17."