According to people familiar with the discussions, the council of ministers would be similar in make up and size to the Group of 20, and shift power more towards rising economic powers from the handful of industrial giants that have dominated post-World War Two policymaking.
A meeting of Group of Seven finance ministers in Rome this weekend is likely to hear about the proposal but it is expected to be debated at length in the run-up to the Group of 20 meeting in London on April 2.
Domenico Lombardi, president of the Oxford Institute for Economic Policy and a former IMF board member, said the move would increase political involvement in IMF decisions on the global economy and thereby boost its relevance.
"The IMF has lost relevance in recent times mostly because member countries have withdrawn their political capital," Lombardi said.
"Setting up a council would increase the political accountability of its member countries, it would foster the political engagement of member countries into the institution, which is absolutely crucial to have the IMF at the center of the international monetary system," added Lombardi, who is also a senior scholar at the Brookings Institution.
The council, which is already provided for in the Fund's Articles of Agreement, would replace the 24-member policy-setting International Monetary and Financial Committee chaired by Egypt's Finance Minister Youssef Boutros-Ghali.
The idea of a council as the IMF's ultimate decision-making body was raised last year by the Fund's internal watchdog which looked at how to improve the IMF's governing structures.
A confluence of factors around the worst global financial crisis in living memory is forcing long sought-after changes in the IMF, including the sensitive issue of how to give emerging markets greater voting power in the Fund.
Reckless lending in the US housing market has rippled across the global financial system, bringing world growth to a grinding halt and freezing international credit markets.
The US-led crisis has prompted calls by emerging markets, increasingly caught in the economic storm, for the IMF to get tougher with advanced nations.
"The current financial crisis has exposed inadequacies in the International Monetary Fund's structure and operations," Australian Prime Minister Kevin Rudd wrote in an editorial this week.
"The Fund not only failed to foresee this crisis, but its resources and governance structure have proved inadequate to deal with it," said Rudd. Australia together with South Africa are chairing a G20 committee on IMF reforms.
RECAPITALIZING THE IMF
Also on the G7 weekend agenda is how to increase the IMF's resources to ensure it has enough cash to bail out countries felled by the crisis. In recent months the IMF has approved emergency loans for Hungary, Latvia, Iceland, Ukraine, Serbia and Belarus.
IMF Managing Director Dominique Strauss-Kahn has called for a doubling of the IMF's resources to $500 billion (Dh1.84 trillion). With an existing war chest of $250 billion and Japan ready to lend the Fund $100 billion, its still $150 billion short of target.
While Strauss-Kahn has said there is no immediate danger the IMF could run out of cash, a prolonged recession and credit freeze could force more countries to turn to the IMF for help.
Currently, IMF members are considering ways to increase the IMF's resources including by providing loans to the institution and are also exploring whether the IMF could issue bonds to central banks, which would be a first for the lender.
But international economists are not ruling out the possibility that conditions could get worse quickly in the months ahead as capital flows slow to a trickle, making it difficult for mainly corporations in emerging economies that once had access to global credit markets to obtain funding.
With signs that the United States is unlikely to resolve its banking crisis any time soon, economists are now warning that credit conditions are about to get worse.
The G7 is also expected to review the IMF's cacophony of lending instruments and push for changes to existing facilities or new ones to reflect members' current needs.
The Fund has long struggled to come up with an acceptable contingency facility with lines of credit for well-run emerging market economies that they can tap when needed, without signaling to financial markets the country may be in trouble.
Last year, the IMF won agreement among members to pass a short-term liquidity facility for emerging economies. Still, shortcomings in the facility's design has kept potential borrowers away, with some arguing for a bigger capital pool over a longer period.