Billionaire investor George Soros said European leaders must overhaul sovereign debt and allow the euro rescue fund to strengthen the region’s financial system to avoid the “danger of another Lehman.”

European Union policy risks locking in imbalances between countries running trade surpluses and those “sinking under the weight the debt,” Soros said today at the Munich Security Conference. The euro, which was supposed to create “convergence,” has propelled the imbalance, he said.

“The structure that’s being currently discussed will cast that divergence in stone,” Soros said.

Soros said the 440 billion-euro ($598 billion) fund, known as the European Financial Stability Facility, should be modified to allow it to provide direct financing to the financial system, “either in the form of equity or debt.” The EFSF, which is set to expire in 2013, was designed to provide states blocked off from the bond market by soaring rates a line of cheaper credit.

EU leaders are struggling to forge agreement on remedies to the crisis, including proposals to extend the powers of the fund. The EU aims to have a package of measures in place by the time leaders meet in Brussels in late March.

The chairman and founder of Soros Fund Management LLC said EU policy makers must also enable indebted states to reorganize debt, a move they’re reluctant to make because the financial system is too fragile.