Euro zone countries held intensive talks on Wednesday on a possible rescue for Greece, whose debt crisis has shaken the entire currency union, as civil servants staged the first big strike against Athens' austerity plans.
Financial markets gave Greece some respite as investors hoped that other European governments would help Athens to head off a possible default on its debt repayments.
Finance ministers of the 16 countries that share the common European currency scheduled a video conference for Wednesday to discuss the issue, a European Commission spokesman said.
However, EU law offers no clear procedure for staging the first bailout of a euro zone country in the currency's 11-year history.
One possibility was for individual countries to offer bilateral aid and Germany, one of the few whose finances are in anything like a fit state to do so, might take a leading role. This could sidestep rules which restrict financial rescues at an EU or euro zone level.
In Berlin, sources in the coalition government said a deal on which countries would help Greece, and by how much, could be reached on the sidelines of an EU leaders' summit on Thursday.
Athens needs to borrow about 53 billion euros ($73 billion) this year to cover a huge budget deficit and refinance debt which is coming due. But investors have taken fright over the risks involved in buying Greek bonds, and the government could slide toward default if they boycott future debt auctions.
Germany and France would probably bear the lion's share of any aid, since Italy and Spain, the other two big economies in the euro zone, are themselves under financial pressure.
So far, officials across European capitals seem to have decided little apart from the likely need to offer a financial lifeline to the Greek government, which is sitting on a debts forecast to hit 294 billion euros this year.
In Berlin talks were under way both within the center-right coalition and with other euro zone governments.
It has not yet been conclusively decided, said one person who attended a meeting with German conservatives and Finance Minister Wolfgang Schaeuble. At the moment, various ideas are being discussed about what could be done, said the source.
Greece accounts for only a small percentage of euro zone output. But news that its budget deficit had spiraled to 12.7 percent of gross domestic product last year, more than twice the announced level, dented investors' confidence across the currency union and beyond.
Talk of a bailout lifted the world stocks and the euro. The pan-European FTSEurofirst 300 index rose 1.3 percent, the Athens benchmark was up 4.8 percent and Greek bank shares surged 8 percent.
Investors also regained a little faith in Greek government bonds, which they have sold heavily in recent weeks. The yield on 10-year government bonds was 276 basis point higher than on the German equivalent, the narrowest in three weeks, and way below the recent high of around 400 basis points.
PAPANDREOU SEEKS SUPPORT
In Athens, striking civil servants grounded flights and shut many schools and offices in a foretaste of the resistance the Socialist government faces to a wage freeze, pay cuts for higher public sector earners, tax rises and a later retirement age.
Riot police briefly fired teargas demonstrators who tried to break a security cordon but the protests were mostly peaceful. Some Greeks seemed willing to give the government the benefit of the doubt despite the harsh austerity plans.
Greek Prime Minister George Papandreou held talks in Paris to seek support from the second biggest euro zone economy for his drive to slash a huge budget deficit, although a French source said there was no agreement yet on aid.
We are ready to take any measures in order to make this sure and guaranteed that we reach this goal, Papandreou said, speaking at the Elysee Palace, adding that his government's deficit-cutting plan would be implemented in every detail.
Rating agencies and EU policymakers have said Greece, which is prone to violent street protests, will not get support for free and urged the government to be firm.
Credit ratings agency Moody's said partial implementation of Greece's budgetary reforms would risk the country's debt being downgraded to Baa1.
Private and public sector unions plan another show of strength with a general strike on February 24.
EYES ON EU SUMMIT
EU leaders meeting in Brussels on Thursday with European Central Bank president Jean-Claude Trichet may well issue a statement on Greece's financial crisis, an EU source said.
Any financial assistance would likely be tied to strict conditions, but the nature and scale of a rescue remain unclear, partly because a treaty prohibition on EU bail-outs for euro zone members complicates the task.
Economists at the Bruegel economic think-tank estimated Greece's needs in a range of 12-24 billion euros.
The Wall Street Journal said Berlin was considering taking a lead role with other EU partners in offering Greece and other highly indebted euro zone countries loan guarantees in an effort to calm market fears of a default.
A bilateral German bailout could involve a state-owned German bank, like the KfW, buying Greek government bonds, a German member of the European Parliament said on Wednesday.
(Additional reporting by Madeline Chambers in Berlin, Marcin Grajewski and Jan Strupczewski in Brussels, Anna Willard and Emmanuel Jarry in Paris and Emilia Sithole and Dominic Lau in London; writing by Paul Taylor and David Stamp, editing by Mike Peacock)