Intense European pressure forced debt-stricken Greece to seek political consensus on a new bailout plan instead of holding a referendum after EU leaders raised the prospect of a Greek exit from the euro 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 on Thursday, with anxious world leaders urging Europe to act to stop contagion from its sovereign debt crisis.
Greek Prime Minister George Papandreou bowed to cabinet rebels and agreed to step down and make way for a negotiated coalition government if his Socialists back him in a confidence vote on Friday, government sources told Reuters.
He was told that he must leave calmly in order to save his (PASOK) party, one source said on condition of anonymity. He agreed to step down. It was very civilised, with no acrimony.
Papandreou, son and grandson of left-wing prime ministers, hinted he was ready to quit for the sake of national unity, telling parliament he was not wedded to his job.
G20 leaders meeting in Cannes discussed increasing the International Monetary Fund's resources and building a financial firewall to protect vulnerable euro zone economies Italy and Spain from a possible Greek default.
Papandreou said his call this week for a referendum, which sparked panic on global financial markets and infuriated European partners, was never a purpose in itself, and he would be happy if the vote were not held.
Papandreou told PASOK lawmakers he had agreed to talks with the centre-right opposition on a transitional government to implement a new EU/IMF bailout programme agreed last week, and pave the way for early elections.
At a bruising meeting in Cannes on Wednesday night, French President Nicolas Sarkozy and German Chancellor Angela Merkel warned him 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 referendum.
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).
Italy was next in the euro zone firing line, facing fierce pressure to make good on long delayed economic reforms.
European G20 leaders along with U.S. President Barack Obama, IMF Managing Director Christine Lagarde and new ECB President Mario Draghi met on the sidelines to press Italian Prime Minister Silvio Berlusconi for a timetable for key labour market, pension and privatisation measures, EU sources said.
Berlusconi failed to win agreement from his divided centre-right cabinet for the reforms just before flying to Cannes.
A draft plan agreed with the G20 on Thursday includes a commitment by Italy to get its budget deficit near balance by 2013 and to rapidly reduce its debt-to-GDP ratio, sources told Reuters. That is less ambitious than Italy's promise only last month to balance its budget in 2013.
EU leaders are concerned that if Italy cannot get its finances in order, the economy -- the eurozone's third largest -- could go the way of Greece, Ireland and Portugal in needing a bailout from the EU.
In Athens, Finance Minister Evangelos Venizelos led the revolt against Papandreou, saying Greece's euro membership was a historic achievement and cannot depend on a referendum.
Dissident PASOK lawmakers called for a temporary national unity government, which some suggested could be led by former ECB vice-president Lucas Papademos.
Signalling for the first time a will to compromise, opposition leader Antonis Samaras called for a transitional government to lead Greece to early elections within weeks and said parliament should first ratify last week's 130 billion euro ($178 billion) bailout deal.
European Union leaders have long called for national unity in support of painful austerity measures required 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 starting to bear 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 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. A telephone poll found 86 percent of Germans want Greece out of the currency.
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.
Obama said Europe had taken some important steps towards a comprehensive solution to its debt crisis but now 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.
Euro zone finance ministers are working to accelerate implementation of an 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 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.
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.
(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)