Greek Prime Minister George Papandreou told his cabinet on Monday it was crucial to accept years of austerity to secure a new international bailout, a challenge for a nation already seething over corruption.

Unease is growing within Papandreou's ranks about the consequences of waves of budget cuts demanded under successive deals with the European Union and the IMF -- and this could turn into alarm after at least 80,000 Greeks crammed a central Athens square to vent their anger over the dire state of the nation.

As the government struggles to prevent Greece from defaulting on its debt, the Socialist cabinet debated for eight hours a medium-term economic plan which will impose 6.4 billion euros of extra savings in the rest of this year alone.

Today our decisions and our stance on the way to the (EU) summit will decide the future of our country, as negotiations with our partners have not been completed, Papandreou told his ministers. The following days and weeks are critical.

This is the first stage of a drive to turn the plan, agreed on Friday with the EU and the IMF as the price of a new financial rescue, into law despite signs of dissent in the ruling party.

Papandreou will present the plan to the political council of his PASOK party on Tuesday, before the cabinet clears it the following day and sends it to parliament.

Papandreou is likely to reshuffle his cabinet at some stage as part of an effort to overcome resistance, not least in PASOK.

In a bid to show he is sympathetic to the daily street protests, he told his cabinet he was open to the idea of a referendum to secure the widest possible consensus and would ask for legislation to be able to conduct one, though analysts consider it highly unlikely he would do so.

Opinion polls show a large majority of Greeks strongly oppose his policies. A referendum would reject his planned measures, opening the way for early elections, an option he has ruled out because it would produce a political stalemate.


Greece's international lenders say the new bailout package, which would replace a 110 billion euro deal agreed only a year ago, depends on Athens keeping to its promises for further austerity and accelerated privatizations.

The bailout assumed that Greece could resume borrowing commercially early next year. This now appears inconceivable, meaning a new package is vital.

European Economic Affairs Commissioner Olli Rehn and the chairman of the Eurogroup, Jean-Claude Juncker, told the European Parliament's economic committee on Monday they would stand by Greece but Athens also needed to work harder on its fiscal goals and on cementing national consensus.

You can't really expect other people to help, other people to show solidarity if you can't sort yourselves out internally. This isn't a matter of party politics. It is about Greece, Juncker said.

Papandreou has used his parliamentary majority to ram through successive rounds of austerity. But faced with the popular anger, some PASOK lawmakers are becoming uneasy.

A group of 16 wrote to him last week demanding a full party debate on the plan as a matter of patriotism and democracy.

In Berlin, a government spokesman said Chancellor Angela Merkel conditionally backed plans for private creditors to share in the burden of covering Greece's funding.

But acting IMF chief John Lipsky stressed that the latest plan for Greece does not contemplate debt restructuring, although Greece's funding needs still had to be confirmed.

The European Central Bank opposes any attempt to cut the overall value of creditors' bond holdings, known as a haircut. It fears that any failure to repay creditors in full would provoke a crisis at weaker banks with big Greek debt holdings, leading to a violent reaction on global financial markets.

German and French banks held over two thirds of Greek government bonds in international lenders' hands at the end of last year, bank lending data showed on Monday.

While officials are playing down the chances of a default, creditors may be asked to buy new Greek bonds when old ones mature, to avoid Athens having to produce more money up front.

Papandreou is under huge pressure from voters who are suffering under pay and pension cuts and soaring unemployment.

On Sunday night, 80,000 people crammed into the capital's Syntagma Square to show they are close to the limit of their endurance. A rally late on Monday got off to a slow start.

(Additional reporting by Keith Weir and Steve Slater in London; writing by David Stamp and Dina Kyriakidou, editing by Tim Pearce)