Germany and France have agreed to help Greece sell bonds in return for stronger efforts by Athens to slash its budget deficit, a Greek newspaper said on Saturday, but a senior German official denied the report.

The Greek finance ministry and the European Commission declined to comment on the report, which came after signs that diplomatic efforts were underway to resolve Greece's debt crisis. There was no immediate comment from France's government.

Germany's state-owned development bank KfW will buy Greek government bonds or provide guarantees for other banks to buy them, said Ta Nea, a major Greek newspaper, quoting unnamed banking and official sources.

France's state-owned bank Caisse des Depots will also be involved in the aid, Ta Nea reported, adding that French President Nicolas Sarkozy had discussed this by telephone with Greek Prime Minister George Papandreou.

In return, the Greek government has agreed to introduce additional austerity measures worth some 4 billion euros ($5.4 billion) to reach its target of cutting the budget deficit by 4 percentage points this year, the newspaper said.

The senior German official, who declined to be named, said there was no such agreement. No, this report is nonsense, the official said.

However, a German parliamentary source told Reuters that the government was quietly preparing emergency budget provisions for possible aid to Greece. The finance ministry denied this.

With German public opinion strongly against aiding Greece, Chancellor Angela Merkel's government has been reluctant to offer any concrete monetary assistance, beyond a vague pledge that it will take action if needed to protect financial stability in the euro zone.

CONTINGENCY PLANS

In private, however, senior German financial officials admit contingency plans have been drawn up in case Berlin needs to intervene in Greece's debt crisis, which has caused turmoil in European markets and hurt confidence in the euro currency.

Sources in Germany's ruling coalition told Reuters earlier this month that the coalition was considering having KfW buy Greek bonds.

European Union inspectors visited Athens this week to discuss the crisis. EU Economic Affairs Commissioner Olli Rehn plans to visit Athens next week, and Ta Nea said Rehn would announce the aid plan for Greece during his visit.

Papandreou said on Friday that he would visit Berlin for talks with Merkel on March 5, while Deutsche Bank Chief Executive Josef Ackermann met Papandreou in Athens on Friday.

Media reports in Germany and France have suggested governments in the 16-country euro zone might offer aid worth a total of 20 to 25 billion euros to Greece. Officials have declined to comment on the size of any aid plan.

Greece, which is preparing to tap the euro debt market with its second bond issue this year, has said its funding needs are met until mid-March, and it will need to refinance about 20 billion euros of debt maturing in April and May. Markets worry that Greece may not be able to borrow at affordable rates.

(1 euro = $1.36)

(Additional reporting by Ingrid Melander in Athens, Matthias Sobolewski in Berlin, Astrid Wendlandt in Paris and Foo Yun Chee in Brussels; Editing by Andrew Torchia)

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