The IMF said on Sunday its No. 2 official, John Lipsky, will step in as acting managing director of the global institution in the absence of IMF chief Dominique Strauss-Kahn, who is charged with sexual assault.

IMF spokesman William Murray said Lipsky will meet with members of the IMF board on Sunday to inform them of developments. The board is the main overseer of the IMF’s daily operations.

“In line with standard IMF procedures, John Lipsky, first deputy managing director, is acting managing director while the MD is not in DC,” Murray said in a statement. “Mr. Lipsky will chair the informal Board session today.”

Economists said Mr Strauss-Kahn's absence could not have come at a more sensitive time.

Concerns are growing that Greece will fail to hit IMF imposed targets to qualify for June's €3.3bn payment from last year's original €110bn bail-out.

Simon Ward, chief economist at fund manager Hen-derson, said: "I would think that the Portuguese bail-out is pretty much locked down, but the question of additional support for Greece remains. This will complicate negotiations and I would expect the markets to react negatively."

Mr Ward said Mr Strauss-Kahn, who has denied the sexual assault charges, had been "crucial" in securing US-backed funding of the rescue deals. "He has steam-rollered any opposition to the European bail-outs and has been a crucial figure," said Mr Ward.

"A person a bit less suppor-tive of the eurozone and we could potentially have already seen a default in one of those struggling economies."

US economist Nouriel Roubini said he had expected Mr Strauss-Kahn to back a rescheduling of interest payments on Greek debts rather than any further cash bail-out.

The IMF has already come under pressure from the US Congress to be tougher on European debts. Mr Ward said the arrest could "open the door" to those wanting the IMF to rein in its lending.

The fund has found its ability to offer cash in return for structural reforms, debt rest-ructuring and currency depreciation has been limited in Europe given the EU control of debts and the single currency.

Mr Strauss-Kahn was due to stand down next year. Traditionally, a European leads the IMF, with the US taking the lead at the World Bank. David Cameron has said the IMF should look outside Europe for its new leader, given the growth of India and China.

Separately, Italian central bank governor Mario Draghi is on Monday expected to be approved as the next president of the European Central Bank.

Ms. Caroline Atkinson, Director of External Relations at the International Monetary Fund (IMF), issued the following statement today:

“IMF Managing Director Strauss-Kahn was arrested in New York City. Mr. Strauss-Kahn has retained legal counsel, and the IMF has no comment on the case; all inquiries will be referred to his personal lawyer and to the local authorities.

“The IMF remains fully functioning and operational.”

Markets are expected to react negatively on Monday to the news of Mr Strauss-Kahn's detention in New York.

Europe's finance ministers are due to meet in Brussels on Monday to hammer out the final details of a €78bn (£69bn) IMF-backed bail-out for Portugal and discuss further funding for Greece.

The IMF boss's lawyer says Strauss-Khan will plead not guilty, but the arrest could not have come at a worse time for the euro zone debt crisis as we approach crunch time on the question of what to do about Greece’s debt woes.

What to do about the Greece’s debts?

Analysts at Credit Suisse believe they will have four options to consider about how to allow Athens to meet its 27 billion euro funding gap in 2012, given lack of access to capital markets.

“The most likely option—the path of least resistance, in our view—is a continuation of EU/IMF support, likely through an extension of the initial aid package or through Greece's access to EFSF funding,” said Robert Barrie, the head of European economics at Credit Suisse in a research note.

“A second option would be for the Greek government to speed up its privatisation plan and to attempt to reduce its deficit faster. Options one and two are not mutually exclusive, clearly.”

Option three involves a voluntary extension of Greek debt maturity and would be far harder to reach agreement on in Barrie’s view.

“Germany and some other northern European nations apparently supported such an option at last Friday’s ‘secret’ meeting in Luxembourg, but the ECB and several euro area countries, including France, were strongly against this option—stressing the potential broader economic, social and political consequences of such a decision,” said Barrie

“According to most declarations over the past few days, this option has been put aside, at least for now. But we wouldn’t be surprised if some form of mild private sector involvement returns to the table.”

“A fourth option—a forced restructuring—appears out of the question for all but a few politicians in the euro area at the moment,” said Barrie

With the EU/IMF mission in Greece still to have finalized its conclusions, Barrie does not expect a decision on Greece until the European Council meets in late June.

"This might definitely cause some delays in the short term," the official told Reuters on condition of anonymity, referring to meetings planned for Sunday and Monday.

"Strauss-Kahn had a very good knowledge of Greece's situation," he said.

The official said, "This will not change the IMF's policy on Greece. Greece will continue to implement its programme."

Greek government spokesman Giorgos Petalotis insisted the arrest would not affect his nation's efforts to resolve its financial woes.

"The Greek government deals with institutions, not individuals, and continues unimpeded to implement the program that will get it out of the crisis," Petalotis said.

German Finance Minister Wolfgang Schaeuble struck a similar tone, saying the eurozone meeting would go ahead as planned. And European politicians had already gotten used to the idea that Strauss-Kahn may leave his post soon to run for president of France next year.

Yet others said Strauss-Kahn's immediate departure from the financial stage adds additional uncertainty to the already difficult situation in Europe.

"The leadership vacuum at the IMF comes at a highly inopportune time for Europe, which is teetering on the brink of a full-blown debt crisis," said Eswar Prasad, a professor of international economics at Cornell University and a former IMF official.

Many investors believe that Greece's financial troubles are so overwhelming that a Greek default or a restructuring that would give creditors less than the full value of their bonds is inevitable. But that would be a serious blow to the euro, and eurozone governments and the European Central Bank appear determined to prevent it.