Greek Prime Minister George Papandreou defied demands on Thursday that he resign over his decision to hold a referendum on the nation's euro zone bailout deal, calling instead for his party to unite for a confidence vote in the government.

But Papandreou's hold on power was slipping after two turbulent years, regardless of whether he wins the parliamentary vote. Government sources said he struck a deal with his ministers to step down and hand over to a negotiated coalition government if they helped him win on Friday.

Papandreou fought back off the ropes, saying the referendum plan which provoked uproar at home and around the euro zone had forced the opposition to accept the 130-billion-euro (112 billion pound) rescue and its conditions -- a new wave of deep austerity.

But his public bravado appeared to mask an acceptance that his term as socialist premier, when he has imposed wave after wave of austerity, would come to an end after he had negotiated a coalition deal with the conservative opposition -- provided he survives Friday's vote, the government sources said.

Ministers involved in striking a deal with Papandreou were led by Finance Minister Evangelos Venizelos, saying he should go for the sake of their PASOK party, said the sources, who had knowledge of Thursday's meeting of the socialist cabinet.

LEAVE CALMLY

He was told that he must leave calmly in order to save his party, one source told Reuters on condition of anonymity. He agreed to step down. It was very civilised, with no acrimony.

Papandreou admitted he had made a mistake in calling on Monday for the referendum on a bailout package agreed with the euro zone only last week. German and French leaders summoned him to Cannes on Wednesday where they demanded Greece keep to the deal or decide whether it wanted to stay in the euro zone.

Venizelos told him he must make a graceful exit both for his sake and for the party's sake and that the ministers would help him do it, the source said. This is provided he survives the confidence vote, which is not at all certain.

Greeks have fiercely opposed the spending cuts, tax rises and job losses which have been the price of financial aid from the IMF and the European Union to tackle the nation's huge debt and budget deficit. This has led to a wave of strikes and outbreaks of violence on the streets of Athens.

Analysts declared the referendum idea dead, a relief to euro zone leaders. A no vote would have sunk a deal which is supposed to prevent Greece's debt crisis from dragging down far bigger European economies such as Italy and Spain.

But the analysts also questioned whether Papandreou can survive Friday's confidence vote.

Events in Athens gathered speed a day after Papandreou held the meeting in Cannes with the German and French leaders, who told him Greece would not receive a cent more in aid until it voted to meet its commitments under the bailout deal.

The spectre of a precipitous Greek default and euro exit hung over a meeting of G20 leaders beginning in Cannes on Thursday.

The French Riviera summit had been meant to focus on reforms of the global monetary system and steps to curb speculative capital flows but the shock waves from Greece upended the talks.

DODGING DEMANDS

Papandreou earlier dodged demands for his resignation when he addressed his PASOK party. But opposition leader Antonis Samaras said Papandreou had told him he would not quit.

Papandreou defended putting the bailout to the Greek people, and flatly rejected suggestions by European leaders the nation had to decide simply whether it wanted to stay in the euro or leave it.

We would never choose to hold a referendum on whether we leave or stay in the euro. It's not something you can ask the Greek people about. It is self-evident (they want to stay), he told a meeting of lawmakers of his socialist party PASOK.

I trust the wisdom and the maturity of the Greek people and I trust them ... I'm not saying this romantically, I deeply believe in democracy.

He did offer to drop the referendum if the opposition backed the bailout in parliament, trying to turn the tables on the conservative New Democracy party which called for him to make way for a transitional government and early elections.

He hailed his referendum proposal for forcing Samaras to drop his long-standing opposition to the bailout package.

I am pleased that opening the discussion through the referendum delivered a positive, creative shock, he said. If the opposition comes to the table to back the bailout, a referendum is not needed.

Papandreou called for his party to rally behind him in the confidence vote. Tomorrow's vote is of great importance. It will guarantee how we will continue, our next steps, he said. There must be stability of this parliamentary group regardless of whatever discussion we hold with other parties.

Papandreou is in grave danger of losing the parliamentary vote of confidence on Friday as defections shrink his support. One PASOK lawmaker said she would not support the government, cutting its majority for that vote to just one.

PASOK has 152 deputies in the 300-member parliament. Lawmaker Eva Kaili announced she would stay in the party but refused to support the confidence vote, meaning Papandreou could count at most on the support of 151 deputies.

One analyst rated Papandreou's chances as slim. The prime minister's position is very difficult, since he chose not to respond to the opposition's proposal for a transitional coalition government. Therefore I believe that it is unlikely that he will win the vote tomorrow, said the head of ALCO pollsters, Costas Panagopoulos.

This day had one very positive result, the withdrawal of the prime minister's proposal for a referendum. This is over, it's a dead issue. This is very positive for Greece and a great relief.

BREAKING RANKS

Venizelos broke ranks with Papandreou early in the day, coming out against holding the referendum after the meeting with the German and French leaders.

Venizelos, one of the most powerful men in the PASOK government, originally supported Papandreou's plan. He changed his mind after he and Papandreou attended the emergency summit in Cannes on Wednesday with German Chancellor Angela Merkel and French President Nicolas Sarkozy.

A finance ministry source told Reuters on condition of anonymity that Venizelos believed the vote on the bailout should not be held while eight billion euros in immediate funding to keep Greece afloat still had to be secured.

Under these conditions a referendum is exactly what the country does not need. He would not have objections if all our pending issues such as the loan instalment and the completion of the bailout plan had been sorted out, the source said after the meeting with Merkel and Sarkozy.

It was a very difficult meeting, the source added.

(Additional reporting by Reuters Athens bureau; Writing by David Stamp; Editing by Sophie Hares)