Greece's teetering government backed away from a proposed referendum on staying in the euro on Thursday, while European leaders talked for the first time of a possible Greek exit to preserve the single currency.

Fast-moving events in Athens overshadowed the first day of a summit of the Group of 20 major economies on the French Riviera, with world leaders again anxiously urging Europe to act to stop contagion from its sovereign debt crisis.

They discussed increasing the International Monetary Fund's resources to help distressed states and constructing a financial firewall to protect vulnerable euro zone economies Italy and Spain from a possible Greek default, participants said.

In Athens, beleaguered Prime Minister George Papandreou said his call this week for a referendum, which sparked panic on global financial markets, was never a purpose in itself, and he would be happy if the vote were not held.

Papandreou told lawmakers from his Socialist party he had agreed to talks with the centre-right opposition on a transitional government to implement a new EU/IMF bailout programme. If that led to a consensus in support of the plan, there would be no need for a referendum.

At a bruising meeting in Cannes on Wednesday night, French President Nicolas Sarkozy and German Chancellor Angela Merkel warned Papandreou that Athens would not receive a cent more in aid until it met its commitments to the euro zone.

Greece was due to get a vital 8 billion euro instalment this month and says it will run out of money in mid-December if it does not get the loan.

Despite the turmoil in Athens and uncertainty over the euro zone, European stock markets and the euro rallied in volatile trading as the likelihood grew that Greece would not hold the highly risky public vote.

The European Central Bank also provided a surprise boost by cutting interest rates by 25 points to 1.25 percent and saying its policy of buying euro zone government bonds would continue for now with limited scope to support its monetary policy.

The leaders of China, Russia and the United States pressed the Europeans to move more swiftly to contain the debt crisis, with Washington urging Germany to relent and let the ECB play a greater role in financial firefighting, G20 sources said.

Europe should aid itself. The European Union has everything for that today -- the political authority, the financial resources and the backing of many countries, Russian President Dmitry Medvedev said.

Canadian Prime Minister Stephen Harper said the leaders had discussed contingency plans if Greece were to leave the euro zone, but my expectation is that cooler heads will prevail and the package will be accepted (by Greece).

WILL TO COMPROMISE?

Greek Finance Minister Evangelos Venizelos broke ranks with Papandreou, saying Greece's euro membership was a historic achievement and cannot depend on a referendum. He demanded that the government openly ditch the referendum idea.

Dissident lawmakers in the ruling PASOK party also spoke out against a plebiscite and called for a national unity government or early elections, casting doubt on whether Papandreou would survive the week in office. Some suggested former ECB vice-president Lucas Papademos should head such an administration.

Signalling a will to compromise, opposition leader Antonis Samaras called for a transitional government to lead Greece to early elections and said parliament should first ratify last week's 130 billion euro (110 billion pound) bailout deal.

European Union leaders have long called for national unity in Greece in support of painful austerity measures needed to cut the country's crippling debt, expected to reach 160 percent of gross domestic product this year.

Sarkozy told a news conference the tough message delivered by France and Germany to Greece's political class was showing signs of bearing fruit. Things are progressing, he said, welcoming Samaras' support for the bailout plan.

Euro area leaders talked openly of a possible Greek exit from the 17-nation currency area, seeking to maximise pressure on Athens and preserve the euro in case of a no vote.

Merkel repeated on Thursday that the stability of the euro had priority for Germany over Greece's euro membership, touching a popular nerve at home. Germany's best selling Bild newspaper railed against Greece and demanded it be ejected from the euro.

Merkel also said Italy and Spain must press on with economic reforms.

The chairman of euro zone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, said policymakers were working on possible scenarios for a Greek exit.

The spectre of a possible hard Greek default and euro exit hung over the G20 summit, highlighting Europe's frailty and divisions just when Sarkozy had hoped to showcase his leadership of the world's major economies.

The summit had been meant to focus on reforms of the global monetary system and steps to rein in speculative capital flows and regulate commodities markets, but the shockwaves from Greece upended the talks.

U.S. President Barack Obama said Europe had made some important steps towards a comprehensive solution to its debt crisis but needed to flesh out and implement the plan quickly.

A disorderly Greek default would reverberate across the euro zone, engulfing big economies like Italy and Spain, and potentially plunging the global economy into a recession.

CREDIT LINES?

Earlier in Cannes, leaders of Germany, France, Italy, Spain and top officials from the International Monetary Fund, European Central Bank and EU explored ways of accelerating implementation of a euro zone anti-crisis package agreed on October 27.

That plan, which includes debt relief for Greece, a recapitalisation of European banks and a leveraging of the bloc's rescue fund, was meant to stem the two-year old crisis before Papandreou's referendum call cast the bloc into turmoil.

Officials said the meeting focussed on speeding up the creation of a firewall to protect other vulnerable euro zone states from the fallout from Greece.

The G20 is considering an IMF proposal to create a new short-term line of credit to help countries that are facing economic shocks beyond their control, a G20 official familiar with the talks said.

British finance minister George Osborne said leaders discussed increasing the global lender's resources, which China strongly backed, and he had heard no dissenting voices.

The risk premium on Italian bonds over safe-haven German Bunds has hit euro-lifetime highs this week, despite European Central Bank buying of its bonds. Spain had to pay its highest yield since 2008 at a bond auction on Thursday.

(Additional reporting by Lefteris Papadimas in Athens, David Ljungren, Abhijit Neogy, Giselda Vagnoni, Catherine Bremer, Gernot Heller, Daniel Flynn, Luke Baker, Gui Qing Koh and Alexei Anischuk in Cannes; Writing by Paul Taylor; Editing by Janet McBride)