Europe's debt crisis is the biggest threat to the global economy, the Treasury said on Wednesday, and it called on European policymakers to provide unequivocal support to banks and governments under stress.

A senior Treasury official, speaking ahead of this week's meetings of the global financial leaders, said Europe had escalated its response to the crisis, but more work was needed.

The challenge they have before them is pretty clear. It is to be able to unequivocally ensure that sovereigns with sound fiscal plans have access to affordable financing. It is to unequivocally assure that European banks have the requisite liquidity and are sufficiently capitalized, the official told reporters.

The official, who spoke on condition of anonymity, said that discussions about the European crisis and its impact on global growth and market confidence will be the centerpiece of talks starting on Thursday among finance ministers from the Group of 20 major economies and the International Monetary Fund over the weekend.

An erosion of market and consumer confidence stemming from European worries is threatening U.S. growth at a fragile time for the recovery, the official said.

The meetings will be U.S. Treasury Secretary Timothy Geithner's third effort in as many weeks to prod his European counterparts to for stronger action to resolve the crisis.

The official said Europe needs to devote resources that are commensurate to the scale of the challenge.

To do this, European fiscal authorities must work closely with the European Central Bank to leverage existing bailout funds to extend their clout, the official said, adding that they could adopt some elements of mechanisms employed by the U.S. Treasury and Federal Reserve during the 2008-09 financial crisis.

One example that Treasury has suggested is the Term Asset-Backed Securities Loan Facility, which used $20 billion in Treasury credit guarantees that gave the Fed $200 billion in lending capacity to help restart frozen credit markets in 2009 and 2010.

FISCAL DIFFERENCES

Geithner also has called on wealthier European states, namely Germany, to provide more fiscal support to their economies, an idea that has been firmly rejected by EU policymakers.

While the United States will discuss Obama's proposed jobs plan, it won't likely make a big push on this front at the G20 and IMF meetings.

We recognize other countries are going to make different choices on how to stimulate growth for their economies while reducing fiscal deficits. I don't expect differences over fiscal policy to be a centerpiece of the discussions this weekend. the official said.

But Washington will call upon the G20's key emerging market members, including China and India, to do more to boost their own domestic demand, which can help take up slack in global growth. A key part of this would be to let their currencies rise more rapidly, the official said.

China's yuan remains substantially undervalued and allowing it to rise would aid Beijing's fight against inflation, and encourage other emerging markets, especially those in Asia, to make their currencies more market-driven, the official said.

Greater exchange rate flexibility is a central instrument for accomplishing this shift to domestic demand led growth, the official added.

(Reporting by David Lawder and Rachelle Younglai; Editing by Padraic Cassidy)

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