But better terms could only come after Athens delivers on commitments it has made to fiscal reform, Charles Dallara, managing director of the Institute of International Finance (IIF), told a news conference while on a trip to Beijing.

"Once that has been done, and I am confident it will be done, Europe and the IMF should move quickly to extend the adjustment period for at least two years and provide the modest additional financial support for that extension to be effective," Dallara said.

"Only some 15-20 billion euros is needed. This can easily be realised in part by reducing interest rates on the loans which Europe and the IMF made to Greece on more concessional terms," he continued, adding that responses to the Greek debt crisis placed too much emphasis on short-term austerity and not enough on improving the country's longer-term competitiveness.

Greek Prime Minister Antonis Samaras, leading a country in its fifth year of recession at a time of rising discontent at home, earlier said he wants two more years to implement economic reforms tied to the aid package to soften their impact.

Athens, where Europe's debt crisis began nearly three years ago, has been boosted by a decision to give Portugal - also the recipient of an international loan package - more time to meet fiscal targets as recession saps Lisbon's ability to deliver.

Under the revised targets, Portugal has until 2014 to bring its budget deficit down to the EU limit of 3 percent, ministers said in a statement on Friday. Previously, the 78 billion euro package required a deficit of 3 percent in 2013.

Inspectors from the so-called troika of the IMF, European Commission and the European Central Bank (ECB) are evaluating Greek progress on agreed targets before releasing the next, 32 billion euro ($41.3 billion) tranche from the giant aid package.

CASH-STRAPPED

Cash-strapped Greece must come up with nearly 12 billion euros of extra cuts for the next two years to get the money, and it has fallen behind in reforms.

IMF Managing Director Christine Lagarde said last week that lenders may agree to some sort of extension.

But Austrian Finance Minister Maria Fekter said in a newspaper interview released on Sunday that Athens would get "a few weeks" more time to meet terms of its international rescue. The idea of having a year or two was dead and no extra money was on the table, she said.

Greece's second loan deal envisages Athens returning to international markets by 2015, but with two consecutive parliamentary elections in May and June after political parties struggled to form a coalition, the country lost ground on its reform agenda. Deepening recession has also made the debt targets less attainable.

Dallara welcomed the ECB's commitment this month to launch a potentially unlimited bond-buying programme to lower the borrowing costs of struggling euro zone countries in a bid to end the debt crisis, but said it was at risk of failure.

"The announcement by the ECB was very bold on the one hand, but it will come to naught, nothing, unless Spain or Italy ask for EU/IMF endorsement of an economic programme," Dallara said.

"In the absence of a governmental negotiation of a reform programme that is endorsed by the European Commission, the massive potential support by the ECB will remain just potential and will not materialise," he said.

Spain told euro zone finance ministers last week it would set clear deadlines for structural reforms by the end of the month, in a move European diplomats said would pave the way for an aid request before long to help it tackle its debt pile.

Madrid's borrowing costs have fallen sharply since the ECB said it was ready to buy Spanish bonds, but big borrowing needs before the year-end and a deepening recession mean most analysts and policymakers believe it is only a matter of time before it will require help.

Madrid's pledge is seen by EU diplomats as a precursor to a request that pre-empts any euro zone calls for further reforms in an attempt to limit a political backlash at home.

The new reform programme will be made public along with the 2013 budget on September 28, the day Madrid will also publish the results of a final stress test of the country's banking sector.

Euro zone officials have speculated Spain could apply in time for a meeting of euro zone finance ministers on October 8.

Madrid has so far resisted austerity conditions that go beyond the EU policy recommendations it is already implementing, while north European creditors led by Germany are adamant that any aid would come on tougher terms.

Such frictions were damaging to the future of the single currency bloc, Dallara said.

"Europe has the potential to move past this crisis, but only if there is a greater consensus among the 17 countries that they want a unified future, not a fragmented future which pulls apart the euro zone at its very roots."

($1 = 0.7612 euros)

(Editing by Don Durfee & Kim Coghill)

(lucy.hornby@thomsonreuters.com; +86 10 6627 1269; Reuters Messaging: lucy.hornby.thomsonreuters.com@reuters.net)

• A Permanent Economic Emergency