The outlook for UK financial stability had “worsened” because of the crisis in Greece Bank of England governor Mark Carney has claimed.
Speaking at the latest Financial Stability Report briefing, My Carney added that events in Greece had “moved very quickly” and said there were risks of a further widespread sell-off in financial markets and potential credit squeeze triggered by the crisis.
Greece is now the first developed nation to fail to make an International Monetary Fund (IMF) payment of g1.6 billion (£1.1 billion).
Greece has been in talks for months with its three creditors - the IMF, the European Central Bank and the European Commission.
The stricken country has closed its banks for a week and Sunday will see voters effectively decide whether to stay in the euro.
Mr Carney said the exposure of UK banks to the Greek economy was very small.
But he added: “In contrast our economy’s exposure to the euro area is considerable.
“UK authorities will continue to monitor the situation thoroughly and will take any action necessary to safeguard UK financial stability.”
Mr Carney said the Bank had been working with the Treasury and authorities across Europe to draw up contingency plans.
He sought to reassure Britons that their direct exposure through UK banks and businesses to the Greek crisis was “minimal”, although he said there was some exposure to those holidaying in the country.
He added while the economy’s exposure to the euro area was “considerable” any persistent impact to UK growth from Greece was unlikely and stressed the Bank had taken action to shield the financial system from shocks over recent years.
But he said: “Our job is not to take that for granted.
“The risks arising from Greece and the global economy will test market liquidity and could potentially trigger broader adjustments in financial markets,” he cautioned.
In its half-yearly Financial Stability Report, the Bank warned of financial instability if a lack of liquidity made it harder for banks, businesses and households to borrow.
A reduced amount of liquidity in financial markets can impact the ability for investors to sell shares and bonds when markets fall sharply, which in turn could lead to a credit squeeze.
But the Bank is able to provide emergency lending to banks and shore up other key parts of the financial system if sources of funding dry up.