Euro zone finance ministers meeting on Monday face pressure to increase the size of a 750 billion euro ($1.006 trillion) safety net for debt-stricken members in order to halt contagion in the single currency bloc.

International Monetary Fund chief Dominique Strauss-Kahn will call on ministers to boost the rescue pool and urge the European Central Bank (ECB) to step up its purchases of bonds to stem the crisis, according to an IMF report obtained by Reuters.

The ECB engineered a dip in the soaring borrowing costs of weaker euro zone states late last week by stepping up purchases of Irish and Portuguese government bonds, according to traders, and hinting it could do more.

But yield spreads over safe-haven German Bunds rose again on Monday, as did the cost of insuring their debt against default, and many analysts say only sustained, massive central bank bond-buying can reverse the trend.

The IMF report says a recovery in the euro zone, led by strong growth in its largest economy Germany, could easily be derailed by renewed market turmoil and describes pressure on so-called peripheral euro countries as a severe downside risk.

Wide differences remain in the 16-nation single currency area over how to overcome a debt crisis that has already led to EU-IMF bailouts for Greece and Ireland, and now threatens to spread to Portugal, Spain and possibly Italy.

Jean-Claude Juncker, chairman of euro zone finance ministers, and Italian Finance Minister Giulio Tremonti made a joint proposal in Monday's Financial Times for a joint sovereign bond, or E-bond, to send a signal to markets and citizens of the irreversibility of the euro.

EU paymaster Germany has so far insisted there is no need to increase the bailout fund and opposed underwriting common bonds, which it fears could increase its own borrowing costs and remove the incentive for profligate countries to cut their deficits.

Finance Minister Wolfgang Schaeuble said in an interview published on Monday the risk of an anti-euro political party emerging in Germany should be taken seriously.

He also said E-bonds were not the solution because they would require fundamental changes in European treaties.

As long as we have national competence for fiscal policy, we cannot give up the instrument for incentives and sanctions for the member states of Europe (to ensure) discipline in their national budget policies, Schaeuble said in an FT video interview. Otherwise, the euro would fail.

The euro has become more unpopular among Germans since this year's financial rescue of heavily indebted Greece, which ran counter to a no bailout principle established before the euro was created in 1999.

IRISH RESPITE

The IMF report and the situation on European debt markets will be discussed at length, a euro zone source said, at the regular Monday meeting of the so-called Eurogroup.

That will be followed by a meeting on Tuesday of ministers from the broader 27-nation European Union, who are expected to formally approve an 85 billion euro aid package for Ireland and discuss the reform of EU budget rules.

Dublin gained a small respite on Monday when clearing house LCH.Clearnet reduced the deposit it requires bond traders to pay on Irish sovereign bonds to 30 percent of net positions from an emergency level of 45 percent set on November 25 before the rescue.

The Irish government is set to win support in parliament on Tuesday for a tough austerity budget after the main opposition Fine Gael party said it expected the measure to pass.

One Fine Gael lawmaker offered to throw Prime Minister Brian Cowen's unpopular government a lifeline by abstaining if needed to ensure the budget goes through.

The rolling market pressure on euro zone sovereign debt has prompted speculation, mostly in Britain and the United States, that the single currency might break up or that some weaker countries might have to leave it.

But Ewald Nowotny, a member of the ECB governing council, said on Austrian television that the euro zone economy had become so closely intertwined that splitting off states with debt problems would be counterproductive.

Europe has already grown together so much that an amputation would have massive disadvantages for both sides, he said.

In comments that could fuel market pressure on Madrid, Austrian Chancellor Werner Faymann was quoted as saying that Spain may not be able to avoid seeking a bailout.

The Spaniards will do everything to keep from coming into the safety net. Unfortunately, no one can rule that out, he told Profil magazine.

Spain approved privatization plans by decree last Friday, promised accelerated pension reform, raised tobacco tax and cut wind-power subsidies in moves to assuage financial markets and reduce the government's big 2011 borrowing requirement.

Spanish Economy Minister Elena Salgado said increasing the euro zone rescue fund was not the question for the moment.

In an interview with French business daily Les Echos, she also said Spanish economic fundamentals were sound and the country would not appeal for financial support.

Portugal, widely seen as the next euro zone domino at risk of a bailout, has resisted any new measures on top of a tough 2011 budget approved last month.

(Additional reporting by Sylvia Westall and Michael Shields in Vienna, Nick Vinocur in Paris and Michel Rose in London; Writing by Noah Barkin and Paul Taylor; Editing by Janet McBride)