The prospect of a second bailout for debt-stricken Greece assuaged market fears of default on Friday as the country's prime minister flew to Luxembourg to present plans for deeper austerity measures.

Prime Minister George Papandreou will outline a medium-term budget plan for deeper spending cuts, increased revenue and a faster sell-off of state assets to Jean-Claude Juncker, chairman of finance ministers of the 17-nation single currency.

Greek bond yields and the cost of insuring Greek debt against default fell sharply after a source familiar with the negotiations told Reuters that euro area officials had agreed in principle on a new rescue program with extra official funding.

Also on Friday, inspectors from the European Commission, the European Central Bank and the International Monetary Fund -- known as the Troika -- will issue their verdict on Greece's troubled implementation of the bailout plan agreed last year.

Athens has veered off course because of a revenue shortfall due to a deep recession and chronic tax evasion, requiring extra measures worth 6.4 billion euros ($9.2 billion) or 2.8 percent of gross domestic product this year to meet its targets.

The prime minister will present the main points of the mid-term plan to Juncker, which include speedier privatizations and new measures to cut government spending and raise revenues, a senior Greek government official said.

Leftists staged a protest at the finance ministry in Athens, hanging a huge banner across the building to denounce policies which they said would turn workers into modern slaves.

The new program faces rising opposition from trade unions and youth protesters, as well as from some back-bench members of Papandreou's governing PASOK socialist party.

Increased European funding for Greece may in turn face resistance in the parliaments of fiscally conservative northern states, especially Germany and the Netherlands.

AVOID CREDIT EVENT

Deputy finance ministers of the euro zone meeting in Vienna on Wednesday night reached an outline deal on a three-year program for Greece to run until mid-2014 but detailed funding arrangements remain to be agreed, the source said.

The new plan would effectively supersede a 110 billion euro rescue Greece agreed with the European Union and IMF a year ago.

But whereas taxpayers have so far borne the brunt of rescuing Greece and fellow euro zone members Ireland and Portugal, the new deal would involve some participation of private sector investors, the source told Reuters.

Some European politicians and economists have argued that investors who bought Greek government bonds should share that burden, perhaps by cutting the value or extending maturities.

Claudio Loser, a former director of the Western Hemisphere for the IMF, told Reuters Insider the Fund should push harder for Greece to restructure its debt and negotiate so-called haircuts with bondholders.

Greece will have to take one or two of the two actions -- restructuring with a haircut and maybe abandoning the euro, although I would say abandoning the euro will be more complicated, Loser said.

The European Central Bank has fought such ideas, fearing it would provoke a crisis among European banks which hold large sums in Greek debt, and lead to a violent chain reaction on financial markets far beyond Greek borders.

The source said the participation of private sector investors in the new deal would be limited to avoid triggering a credit event. He gave no figures.

Short-dated Greek government bond yields and credit default swaps, which provide insurance against default, fell on Friday with investors citing the agreement to avoid any form of debt restructuring that could prompt market representatives to declare a credit event.

I think (official lenders) have a plan in their head that is reasonable for kicking the can down the road another three months, said Gianluca Salford, European fixed income strategist at JP Morgan.

One scenario, the Greek newspaper Kathimerini reported, is for the bailout to total 85 billion euros over three years up to 2014, with the EU and International Monetary Fund contributing more than 30-40 billion euros.

The rest would come from privatisation proceeds and a voluntary rollover of privately held bonds, probably to be swapped for new ones maturing 10 to 15 years later, Kathimerini said.

Most market economists polled by Reuters believe Greece's 340 billion euro debt mountain is unsustainable and will have to be restructured sooner or later.

POLITICAL BARRIERS

Activists from the Communist-affiliated PAME group got into the Greek finance ministry, which stands on Syntagma Square where protesters gather nightly to demonstrate against corruption and economic mismanagement.

Organize and fight for an overthrow -- General Strike, read a banner draped from the roof by PAME, which advocates non-violent protest. The Greek flag remained flying from the building but next to it, PAME banners had replaced the usual circle of yellow stars on a blue background of the EU.

We have a sacred duty to our children and ourselves to cancel plans to turn workers into modern slaves, PAME said in a statement. We must not allow our children to work for hunger wages. If we do not fight to overthrow these policies their working future will be hell.

Greece's main public sector union, ADEDY, will join private sector sister union GSEE in a nationwide strike on June 15.

(Additional reporting by George Georgiopoulos and Ingrid Melander in Athens, Paul Taylor in Paris, Marius Zaharia, Ana Nicolaci da Costa and Chloe Hayward in London; writing by Paul Taylor; Editing by Ruth Pitchford)