Treasury officials said Chancellor George Osborne regards “Grexit” as “a very serious risk” to the economy of both Britain and the wider world.
The comments came as Greece’s central bank warned for the first time that the country could be on a “painful course” to debt default and exit from both the eurozone and the European Union.
The British Chambers of Commerce (BCC) warned that market upheavals caused by “a messy Grexit” could hit many UK businesses and called on central banks and governments to take action to limit disruption “through all means possible”.
Talks continue between the Athens government and its international creditors over an economic reform deal which has held up more than £5 billion in bailout payments needed to allow Greece to continue servicing its debts.
Eurozone finance ministers meet in Luxembourg today to try to find a way forward, and the crisis is expected to dominate a European Council summit of EU leaders, including Prime Minister David Cameron, in Brussels next week.
The Prime Minister’s official spokeswoman said the government was taking “all steps to prepare” for the possibility of Grexit.
The comment came as the Bank of Greece said in a new report that agreement with the country’s creditors was “a historical imperative that we cannot afford to ignore”, warning that failure in the talks would “mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and, most likely, from the European Union”.
Mr Cameron’s spokeswoman said: “Back in February the Prime Minister chaired a cross-government contingency planning meeting on this issue and you can expect that we are continuing to ensure we have the right plans in place and are stepping up preparations given where discussions have got to.”
The government would not reveal the specific details of the plans, but they included work on the potential impacts on business, the banks and financial sector and tourism.
“I think this is about making sure we can be as prepared as we can be in the event that this happens,” the spokeswoman said.
“The potential default or exit of Greece does present some serious economic risks. So alongside having contingency plans in place, it means ensuring that we have an economy that is growing, that our public finances are in a good order.”
She added that “clearly what we want to see is a solution to the crisis, so in parallel with us making plans we want to see Greece and the euro area finding a solution with this”.
The government’s planning work is being led by the Treasury, in liaison with “the relevant actors” such as the Bank of England.
Mr Cameron was continuing a diplomatic dash around Europe as part of his bid to speak to all of his EU counterparts ahead of next week’s summit about his plans to renegotiate Britain’s membership before the referendum promised by the end of 2017.
He travelled to Milan to meet Italian PM Matteo Renzi, who told him that Rome regards an EU without the UK as “impossible”.
But Irish foreign minister Dara Murphy revealed that Dublin has already started making contingency plans to deal with a possible British exit. Ireland’s Taoiseach, Enda Kenny, will discuss Britain’s position with Mr Cameron during a visit to Downing Street today.
Mr Murphy said: “The core focus at the moment is the strategy around negotiation to play a part in keeping the UK in the European Union.
“But, yes, it would be remiss of us given the possibility that our largest trading partner may be exiting the European Union – that is something we, of course, are looking at.”
Mr Cameron said that he and Mr Renzi had “very good discussions” on “the importance of reform and change in Europe, where I think we do have some common perspectives and some common ideas on the need for competitiveness, for flexibility”.
Chancellor Mr Osborne told MPs on Tuesday that “people should not underestimate” the damage a Greek exit would do to financial confidence.
A Treasury source said: “We don’t comment on any contingency planning for these kinds of things. We have got plans in place to deal with the risks of a Greek situation arising.
“As the Chancellor said, it is a serious risk to the British economy. It is obviously something we would want to plan for.” BCC director general John Longworth said: “With a messy Grexit looking increasingly likely, many UK businesses may be hit by the resulting market upheaval, changes in trade flows, and payment issues.”
But he added there may be an “opportunity in the agony”, as it would force the eurozone to have “an honest debate about further integration and its future operation to prevent something similar ever happening again”.
“Within those discussions there would be an opportunity for the UK to secure meaningful changes and opt-outs that ensure a reformed EU aids our competitiveness,” said Mr Longworth.
Mr Cameron was later flying to Luxembourg for a working dinner with the country’s prime minister, Xavier Bettel. With further trips to Slovenia and Slovakia today and tomorrow, as well as meetings in London with Mr Kenny and European Parliament president Martin Schulz, Downing Street expects him to have spoken to more than 20 EU leaders by the end of the week.
Britain’s demand for renegotiation of the terms of its EU membership is on the agenda for the Brussels summit, although the meeting is likely to be dominated by the Greek economic crisis.