A European banking collapse is "the sort of shock to the system when things are very fragile, as they are at the moment, that could really push us back into the sort of downturn we experienced in 2008 and 2009", Jones said, according to a transcript of the interview.
Nationalisation is possible, "at least temporarily so", he said.
Emergency steps, such as unlimited loans from the European Central Bank, are keeping many banks in Greece, Portugal, Italy and Spain solvent and easing the lending of others, while low interest rates and debt buying are containing borrowing costs.
Such aid is needed to counter concerns about slowing economic growth and sovereign debt that are prompting banks to curb lending, stockpile dollars and hoard cash.
There's little sign of a rebound in Europe - France's economy stalled in the second quarter, Germany's expanded 0.1 per cent and Britain's gross domestic product grew 0.2 per cent.
"A lot of the European banks had a lot of the government bonds which have been issued by some of the more, shall we say, struggling economies around the periphery of the eurozone," Jones said. "They are not going to get all of the money back" should those nations default on their debts, he said.
Australian households are saving more as assets, including stocks and houses, decline in value as the Reserve Bank of Australia maintains the benchmark lending rate at a developed-world high of 4.75 per cent.
A 13.5 per cent increase in the Australian dollar in the past year, spurred by a boom in mining investment to meet demand from India and China, is hurting the nation's manufacturing and tourism industries.
On top of the high currency, "the lingering effects of the global financial crisis and continuing international uncertainty have resulted in Australian consumers being a lot more cautious in their spending", Australian Treasurer Wayne Swan said.
Swan also said a tax forum he's convening next month will focus on ways to keep Australia's government debt under control.
RBA Governor Glenn Stevens has signalled a willingness to keep rates on hold while the nation's consumers retrench and global financial markets create instability for the "foreseeable future". Last week he held rates for a ninth straight meeting, citing "unsettled" international markets.
Westpac's Jones said the RBA may need to cut rates as signs emerge the economy is slowing, such as the jobless rate last month climbing to 5.3 per cent from 5.1 per cent, the highest since October.
The Australian economy "is not performing quite the way that the authorities thought it would or would like it to", he said.
"Irrespective of what is going to go on in the global economy, there are growing reasons for the Reserve Bank to embrace a more accommodative approach to monetary policy."
- BLOOMBERG
