A eurozone summit has resumed its work after being temporarily suspended to enable leaders to meet Greek PM Alexis Tsipras separately over a bailout deal.
Mr Tsipras met the German chancellor, the French president and the EU president, as they work to try and reach a deal by the end of Sunday.
Leaders are discussing new proposals put forward by their finance ministers.
A draft of the package suggests Greece could temporarily leave the eurozone if no agreement on a bailout is reached.
The four-page document says "Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring".
Another suggestion is the establishment of an independent fund in which to transfer "valuable Greek assets... to be privatised over time and decrease debt"
The document notes that Greece has agreed to introduce new legislation by Wednesday of a raft of new reforms on VAT and pensions among others.
It also says the Greek government would carry out "ambitious" reforms to pensions and labour markets, "significantly" scale up its privatisation programme and "strengthen the financial sector".
The document noted that the amount of the new bailout could reach €86bn, exceeding the €53.5bn ($59.47bn; £38.4bn) Greece is seeking to cover its debts until 2018.
"The text in its entirety is very bad," one Greek government source was quoted by local media as saying. "We are trying to find solutions."
Tough choices for Greece - by Paul Kirby, BBC News website Europe editor
There may only be four pages, but if this draft document is agreed, it would be an extremely difficult pill for Greeks to swallow.
For Alexis Tsipras and his left-wing Syriza-led administration, some of the ideas would be little short of humiliation.
Even if Greek MPs pass sweeping reforms by Wednesday, the government would have to allow international creditors full monitoring of its work in Athens and agreement of draft laws in advance.
Syriza came to power promising an end to such oversight.
Another possible step is to "amend or compensate" for any laws Syriza pushed through that ran counter to what was agreed with the eurozone in February.
That might mean overturning the reinstatement of 4,000 civil servants such as school guards and cleaning ladies.
And if Greece could not agree to that it could be offered "time-out" from the eurozone, and the chance of restructuring its debt.
Arriving for Sunday's meeting, France's President Francois Hollande dismissed any suggestion of a "time-out" for Greece.
"There is no temporary Grexit, there is a Grexit or there is not a Grexit," he said, adding that he would "do everything to find a deal tonight".
Mr Tsipras was also upbeat, telling reporters: "I'm here ready for an honest compromise... we can reach an agreement tonight if all parties want it."
Mrs Merkel said the key requirement for her is that "the conditions are met" to start negotiations on a third bailout.
"That's what is at stake, nothing more and nothing less," she said.
But she warned that there would be "no agreement at any price", adding: "We have to make sure the pros outweigh the cons - for Greece's future, for the entire eurozone and the principles of our collaboration."
The head of the European Parliament, Martin Schulz, said a deal was absolutely vital to the future of Europe.
"The alternative will be that over the next few years we are going to find ourselves in a catastrophic state of affairs as far as Greece is concerned," he told a news conference in Brussels.
Greece in numbers
€320bn
Greece's debt mountain
€240bn
European bailout
- 177% country's debt-to-GDP ratio
- 25% fall in GDP since 2010
- 26% Greek unemployment rate
Reuters
The Greek government earlier this week set out a new list of austerity measures to try to secure the bailout.
They included many measures that had been rejected by the Greek people in a referendum a week ago.
As the talks drag on, Greece's financial situation is close to collapse.
Greece fell into arrears on an International Monetary Fund repayment on 20 June and faces a €3bn payment to the European Central Bank on 20 July.
Banks have been closed for two weeks and a €60 daily limit on cash machine withdrawals, imposed on 28 June, remains in force for Greek citizens.
Source BBC
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