Greece raised the stakes on Thursday in its quest for EU help to tackle its debt crisis, saying it cannot achieve promised deficit cuts if its borrowing costs remain so high and may have to call in the IMF.
But Athens dismissed a report that it was planning to turn to the global lender as soon as early April if European Union leaders do not agree on a rescue plan next week, calling IMF aid a last resort and saying all options were still open.
Market concerns that it may prove impossible to construct a euro zone financial safety net for the currency area's most heavily indebted member due to German reluctance sent the euro lower and hit Greek bank shares and bonds.
In the latest signs of tension in the euro zone, Spain urged German Chancellor Angela Merkel to avoid talk of possibly expelling fellow members from the single currency, saying such comments could be misconstrued.
What we have to do is coordinate economic policies and not send messages that could be misunderstood, Economy Minister Elena Salgado, who chairs the council of EU finance ministers, told Europa Press news agency in Madrid.
And former Belgian Prime Minister Guy Verhofstadt, now leader of the liberal group in the European Parliament, said he found Merkel's talk of expulsion very disturbing and frankly shocking.
Obviously Merkel no longer wants European solutions, he said in a speech in Paris distributed by his office.
Greek Prime Minister George Papandreou said draconian austerity measures and plans for structural reform showed commitment to the stability of the euro but that high borrowing costs would make it difficult for Greece to meet budget goals.
We will make it, provided that our country can borrow on reasonable terms, he told a cabinet meeting. Based on those conditions, our country is not seeking and will not seek financial aid, either from our European partners or from the IMF, which would be our last resort.
Papandreou earlier told the European Parliament that simply releasing more detail on the nature of a European support mechanism for heavily indebted countries could be enough to reduce borrowing costs and warn off speculators.
The premium investors charge for holding Greek debt rather than benchmark German bonds rose as high as 319 basis points, meaning Athens would have to pay about 6.30 percent to borrow on markets, by far the highest yield in the euro zone.
Economists say such rates would compound Greece's problems in a year when it has to raise 53 billion euros ($72.4 billion), 20 billion of it in refinancing between April 20 and end May.
IMF PAIN WITHOUT MONEY
Papandreou said Greece wanted a decision at an EU summit next week on a mechanism to provide financial support if needed.
He said a visible EU support mechanism could force market rates down and make it unnecessary for Greece to go to the IMF.
We have taken today measures that the IMF would have asked us to take. In fact, we are under an IMF program. However, we don't have the facilities that the IMF could give, he said.
Greece did not want to be in a situation when we have the worst of the IMF and none of the advantages of the euro zone.
Nomura strategist Sean Malony said ambiguity over an EU rescue plan was tempting fate in the markets.
It's like waving a red rag at a bull... it seems like a matter of time before the markets will test them out, he said.
Figures released on Thursday showed unemployment staged its biggest jump in at least 11 years, highlighting the struggle Athens faces to plug big holes in its budget as spending cuts and tax rises threaten to further undermine a shrinking economy.
The jobless rate rose to 10.3 percent in the final quarter of 2009 from 7.9 percent a year earlier.
Analysts said that raising the specter of the first IMF intervention in the euro zone was mostly a tactic to increase pressure for agreement on a European rescue mechanism.
Merkel, facing massive public opposition to bailing out Greece ahead of a crucial regional election in May, has taken the hardest line against any rescue arrangement.
A quick act of solidarity is definitely not the right answer, she told parliament in Berlin on Wednesday, calling for radical changes to the EU treaty to make it possible to expel a serial deficit offender from the euro zone.
After initially excluding any recourse to the International Monetary Fund inside the currency bloc, German government sources have begun this week to say Berlin might not oppose a Greek recourse to the Washington-based global lender.
EU diplomats said this reflected mostly domestic political and legal pressures against a euro zone rescue for Greece but perhaps also an attempt to counter Greek tactics by suggesting the IMF card was not such a nuclear option.
But the EU is divided. While the Netherlands and Italy have said the IMF should not be ruled out, leaders of France, the Eurogroup of finance ministers and the European Central Bank have said it would be a blow to economic and monetary union if a member were to go elsewhere for a bailout.
(Additional reporting by George Georgiopoulos, Angeliki Koutantou and Lefteris Papadimas in Athens, Timothy Heritage in Brussels and William James in London, Nigel Davies in Madrid; writing by Paul Taylor; Editing by Ruth Pitchford)