Greece will miss deficit targets set just months ago in a massive bailout package, sources said citing a budget draft being adopted by the cabinet on Sunday, in a setback in Europe's efforts to stave off the country's bankruptcy.
The dire forecasts come while inspectors from the International Monetary Fund, EU and European Central Bank, known as the troika, are in Athens scouring the country's books to decide whether to approve a loan tranche, without which Greece could run out of cash this month.
Two sources confirmed the new budget numbers, which predict a budget deficit of 8.5 percent of gross domestic product (GDP) for this year and 6.8 percent next year, compared with targets of 7.6 percent for this year and 6.5 percent for 2012.
These are the numbers expected to be submitted to parliament, one of the sources told Reuters.
European Union officials say the troika's assessment of Greece's future prospects could determine whether it needs to demand more debt relief from private creditors, a measure that could effectively amount to default.
European officials are scrambling to avert an abrupt Greek bankruptcy, which would wreck the balance sheets of European banks, jeopardise the future of the single currency and potentially plunge the world into a new global financial crisis.
GDP is predicted to fall by 5.5 percent this year and 2.0-2.5 percent next year. Those numbers are in line with recent forecasts by the IMF, but much worse than predictions used to calculate a 109 billion euro ($146 billion) bailout in July, which anticipated Greece posting a 0.6 percent growth next year.
The shortfall in the 2011 deficit target means Greece would need almost 2 billion extra euros just to finance its expenses for this year. It also means emergency tax hikes and wage cuts announced in the past two months to hit the target have not been enough to put Greece's finances back on track.
To persuade the troika to release the loans, Greece has promised to raise taxes, cut state wages and speed up plans to reduce the number of public sector workers by a fifth by 2015.
The government was also expected to approve a plan to begin the public sector layoffs this year, arguably the most contentious part of its deeply unpopular austerity plans in a country where the constitution bans firing state workers.
Euro zone finance ministers are expected to discuss Greece at a meeting in Brussels on Monday, but will be waiting for the troika inspectors' report before taking any new decisions.
The inspectors are widely expected to give a green light to the release of the next 8 billion euro tranche of aid to avoid plunging the euro zone deeper into turmoil. But all eyes will be on their forecasts for 2012-2014.
If the inspectors conclude that Greece's recession will continue to be worse than predicted, EU officials have suggested that banks that agreed to write off 21 percent of the value of their Greek debt holdings in July may be forced to take deeper losses.
The austerity measures are deeply unpopular, and public sector unions hope that strikes and demonstrations can wreck the Socialist government's resolve to enact them. Striking civil servants have disrupted the talks with the troika over the past days by blockading ministries.
The government has a majority of just four seats in parliament and could be forced into elections if a handful of lawmakers balk. But disgruntled legislators have toed the party line over the past weeks and analysts expect them to continue to do so and pass the new austerity package.
No part of the package is more contentious than the plan to lay off state workers -- who make up a fifth of the Greek workforce and are guaranteed jobs for life under a constitution that bans firing them under nearly all circumstances.
The government plans to begin layoffs by putting 30,000 workers in a labor reserve by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed.
The government has yet to announce how the plan would work. If most workers placed in the reserve are near pension age and planning to retire soon anyway, the savings would be negligible and the inspectors are likely to be unimpressed.
Greek officials said late on Saturday that they were near a solution in their talks with the inspectors on the programme.
We are close to a deal on the labor reserve, one senior official told Reuters after several hours of difficult talks on the issue, adding that the government wanted to resolve the issue on Sunday in time to approve it in the cabinet meeting, scheduled to start at about 1500 GMT.
The inspection visit, which is expected to go well into next week, also focuses on budget plans for 2012-2014 and commitments to raise 50 billion euros from privatisations by 2015 and open up the country's heavily-regulated economy.
(Additional reporting by Lefteris Papadimas; Writing by Peter Graff and Ingrid Melander; Editing by Ruth Pitchford)