Greece's exit from the euro would be a catastrophic political and economic mistake that would severely weaken Europe's single currency bloc, German Chancellor Angela Merkel said in a BBC interview broadcast on Monday.

While Greece faces a long and arduous road, Merkel said European leaders must keep Athens within the euro zone or risk a domino effect that would lead to speculation about more countries abandoning the currency.

This is not only a monetary decision it is a political one. It would be catastrophic if we were to say to one of those who have decided to be with us 'we no longer want you', Merkel told BBC television's Newsnight program. The euro area would be incredibly weakened.

It would be a huge political mistake to allow Greece to leave, she added.

Greece's euro zone partners and the International Monetary Fund approved a second 130 billion euro rescue package earlier this month to keep the debt-ridden country afloat until 2014.

Merkel faced opposition in the German parliament over the Greek bailout from critics who said Athens should have been allowed to default and leave the euro.

Europe and particularly the euro area is in crisis, she told the BBC. It has slithered into crisis as a consequence of the global financial crisis and this has brought about very tough discussions in many countries.

Merkel brushed aside criticism that the latest help for Greece could be the start of an endless bailout program for profligate European countries.

That is not how it is going to happen because there has been a rethink going on in Europe for some time, she told the BBC.

Some countries accepted the rescue package but they don't particularly relish it. They must follow conditions set out by the IMF, the ECB and the European Commission. What democratic government wants to be in that situation for the duration?

No country can live beyond its means and must accept austerity measures to balance the books, she added.

But earlier, Germany signaled for the first time that it may be willing to increase the resources available to tackle the euro zone debt crisis. It had previously given no clear signal on such an increase, with officials indicating that it may not be necessary to do so now that financial markets are calmer.

(Reporting by Peter Griffiths; Editing by Andrew Heavens)