Euro zone countries held intensive talks on Wednesday on a possible rescue for debt-laden Greece while civil servants in Athens staged the first big strike against government austerity plans.
Financial markets gave Greece some respite with investors increasingly anticipating that other European governments, led by Germany and France, would help Athens avoid default, a prospect that has shaken confidence in the euro.
Finance ministers of the 16 countries that share the single European currency and the head of the European Central Bank discussed Greece in a conference call on the eve of a European Union summit set to be dominated by the debt crisis.
They made no public comment but a European official said Eurogroup Chairman Jean-Claude Juncker of Luxembourg would brief EU leaders on Thursday on what can and cannot be done.
EU treaties bar euro zone member states from taking on each others' debts, complicating what would be the first bailout in the currency's 11-year history.
Euro area finance officials said bilateral aid by individual EU members, chiefly Germany and France, or guarantees for Greek debt issues appeared the most likely solution, but cautioned that no decision on the form of assistance was imminent.
Talk of a bailout lifted European stocks, with the pan-European FTSEurofirst 300 index closing up 0.6 percent, while the Athens benchmark rose 2.4 percent and Greek bank shares jumped 4.3 percent. But the euro surrendered earlier gains, slipping 0.4 percent to $1.3728.
EU leaders are expected to express political support for Greece's fiscal reform efforts at the informal summit, and finance ministers will work on the details at a Eurogroup meeting on Monday.
After talks with French President Nicolas Sarkozy in Paris, Greek Prime Minister George Papandreou said that his government would do whatever it takes to meet its ambitious goal to cut the budget deficit from 12.7 percent of gross domestic product last year to below 3 percent by the end of 2012.
We are ready to take any measures in order to make this sure and guaranteed that we reach this goal, Papandreou said.
His office later quoted him as saying: We have not asked for help. we have said that we just want you to support our own will, our country's credibility in implementing this program.
Erkki Liikanen, a governing council member at the European Central Bank, said in a Finnish television interview that the ECB expects and trusts Greece will do what needs to be done with its economy.
He also stressed that each country is responsible for its own public finances.
GERMAN SUPPORT BUILDS
Politicians in Berlin's ruling coalition voiced support for helping Greece despite traditional German concerns about moral hazard if profligate countries are rewarded.
The risk is that bailing Greece out opens the door to similar deals should Portugal, Spain or Italy wind up in trouble, and undermines efforts to make governments implement the harsh cuts necessary to reduce debt.
It's not about Greece, it's about the euro. So of course the federal republic (of Germany) is called upon, Kurt Lauk, a senior member of Chancellor Angela Merkel's Christian Democrats told the business daily Handelsblatt.
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.
But a protest march was thinly attended despite some fiery rhetoric. Opinion polls show Papandreou still has a majority of public support for his plans.
Athens needs to borrow about 53 billion euros ($73 billion) this year to cover its huge budget deficit and refinance debt coming due. But investors have taken fright over the risks involved in buying Greek bonds.
Economists at the Bruegel economic think-tank have estimated Greece's bailout needs in a range of 12-24 billion euros.
Moody's Investors Service said the southern European country's credit rating could be downgraded further in the coming months if implementation of the planned budget reforms is only partial.
But the head of Moody's global sovereign ratings, Pierre Cailleteau, told a French financial daily the risk of Greece defaulting on its debt was very low, and Greek liquidity problems had been greatly exaggerated in the market.
Germany and France would probably contribute most to any aid package, as Italy and Spain -- the other two big economies in the euro zone -- are themselves under financial pressure.
Most euro zone countries oppose going to the International Monetary Fund for reasons of political prestige and to avoid any admission that EU budget discipline rules have failed.