International lenders scrambled to save Greece from default as Prime Minister George Papandreou struggled to quell a revolt in his socialist party against EU/IMF-ordained austerity measures.

The political drama in Athens, where mass street protests turned violent and efforts to form a national unity government collapsed on Wednesday, rocked financial markets already spooked by dithering in Europe over a second bailout for Greece.

The euro hit a record low against the Swiss franc and slid against the dollar and the yen on Thursday as investors fled to safe-haven assets on mounting concerns that Greece's problem are far from resolution.

There were also some signs of growing tension in inter-bank lending on money markets, as occurred when the Greek debt crisis erupted early last year.

In a statement intended to soothe markets, the European Union's top economic official, Olli Rehn, said he expected the EU and the International Monetary Fund to release a crucial 12 billion euro loan tranche in early July to keep Athens afloat.

Rehn acknowledged it would take longer to put together a second rescue package for the heavily indebted state, due to differences over how to make private investors share the burden, but he called for decisions by mid-July rather than leaving the issue until September, as EU paymaster Germany is suggesting.

I am confident that next Sunday, the Eurogroup will be able to decide on the disbursement of the fifth tranche of loans for Greece in early July. And I trust that we will be able to conclude the pending review in agreement with the IMF, he said.

Reeling from strikes, protests and a string of resignations in his PASOK party, Papandreou planned to reshuffle his cabinet and drive through a draconian program of spending cuts, tax rises and state asset sell-offs to meet EU/IMF conditions.

But the resignation of two more PASOK lawmakers on Thursday and a call by a group of dissident socialists for a party caucus meeting to challenge Papandreou's efforts to drive his program through parliament raised doubts about his ability to prevail.

Finance Minister George Papaconstantinou, who is trusted by global lenders and investors but may be sacrificed due to the deep unpopularity of the austerity plan, appealed for unity ahead of the key caucus meeting.

At this very difficult moment, there is only one goal for all of us: stability, to keep the country and its economy on its feet, to continue without interruption the financing of the country by its lenders, he told reporters.

A senior IMF official, Zhu Min, said the Fund was deeply concerned by the turmoil in Athens but stood ready to help if the government can win consent for its fiscal package.

We hope the Greek government will have consent ... and we will be able to conclude our review, he said. We are ready to provide support because it is an absolutely important issue for Greece for Europe and the whole global economy.

The IMF had made the release of the aid tranche due on June 29 conditional on euro zone states agreeing to meet Greece's funding needs for the next 12 months. But several sources said the global lender had now signaled that a political pledge would be enough.

MARKET JITTERS

The cost of insuring Greek debt against default soared to an all-time peak on Thursday, and the risk premium on the bonds of several other euro zone sovereigns -- including Spain and Italy -- rose as investors fled to safe-haven German bunds.

Ireland's finance minister added to market jitters by saying on Wednesday that Dublin would seek to impose losses on senior bondholders in nationalized Anglo Irish Bank and Irish Nationwide Building Society .

The European Commission, which has opposed such a move in the past, said it had not received any proposal from Ireland.

Trade in European money markets showed growing fear that banks may stop lending to each other because of their exposure to Greece, though tensions were not as severe as during the global credit crisis of 2007-2009, when the market froze up.

The one-year euro/dollar currency basis swap spread, which rises when banks become unwilling to supply dollars to each other, widened to 37 basis points, its widest since February, from around 23 bps on Wednesday.

It hit 55 bps when the Greek crisis erupted early last year, and 120 bps after Lehman Brothers collapsed in 2008.

Rehn said he expected euro zone finance ministers to take decisions on a successor program for Greece on July 11.

But two sources briefed by the German government said Berlin wanted to postpone agreement on a new 120 billion euro program, including 30 billion in privatization proceeds, until September due to disputes over how to involve private investors.

A high-level banking source in Germany said Berlin was pushing for the delay to allow time to convince rating agencies.

Backed by the Netherlands and Finland, Germany wants a voluntary debt swap in which bondholders would be given new bonds with a seven-year maturity, but credit rating agencies have warned they would treat that as a selective default.

That could prompt the European Central Bank to refuse to accept Greek bonds as collateral, depriving Greek banks of vital ECB liquidity on which it is totally dependent.

The European Commission, the ECB and France favor a softer form of private sector involvement under which banks would agree to roll over Greek bonds as they mature and are redeemed.

Fitch Ratings appeared to open the door to a possible compromise on Wednesday by saying that while it would treat such a rollover as a restrictive default, it would keep Greek bonds rated at CCC.

However ECB policymaker Lorenzo Bini Smaghi said the ECB would not break its own rules, noting that the EU treaty barred accepting as collateral bonds from a state that is considered to have defaulted.

(Additional reporting by George Georgiopoulos in Athens, Daniel Flynn in Paris, Ilona Wissenbach and Jan Strupczewski in Brussels, Noah Barkin and Andreas Rinke in Berlin, Philipp Halstrick in Frankfurt, Phil Pullella in Rome; writing by Paul Taylor, editing by Mike Peacock/Janet McBride)