A plan for former European Central Bank vice-president Lucas Papademos to lead a Greek government of national unity has run into trouble, party sources said on Wednesday, prolonging political hiatus as the country heads towards bankruptcy.

With the Greek population and the European Union clamouring for a coalition now, a government source said it would be announced later on Wednesday -- but signalled that negotiations were far from over.

In the past two days government sources have made a number of optimistic predictions about forming the government, which must secure a 130-billion-euro (111 billion- pound) bailout from the euro zone, only for no deal to materialise.

The socialist and conservative parties had wanted Papademos, a Greek economist well known in European capitals, to head the new government, aiming to re-establish an international credibility that the politicians lost long ago.

But sources in both parties said this was now in doubt and the two sides were looking at other options.

The Papademos candidacy has hit problems that have to do with both parties, one of the sources told Reuters on condition of anonymity.

UNACCEPTABLE CONDITIONS

Some Greek media reported that Papademos was setting conditions that the parties would not accept, and others that there were objections from Finance Minister Evangelos Venizelos, because Papademos wanted to change the government's economic team.

Greek media have mentioned parliamentary speaker Filippos Petsalnikos and socialist lawmaker Apostolos Kaklamanis as alternative premiers, but both have denied the reports that they had been picked.

Earlier, the government source said outgoing Prime Minister George Papandreou would meet the Greek president at 1000 GMT on Wednesday, and the coalition would be announced the same day.

However, he also said negotiations would continue, signalling that the elusive deal on a government which is due to rule until early elections in February, had yet to be struck.

The stakes could not be higher. Greece must have a new coalition to secure the bailout, negotiate the release of emergency funds from the EU and IMF to avoid bankruptcy when big debt repayments come due next month, and safeguard its place in the euro zone.

On the other hand, the European Union needs to put out the fire in Greece to prove to international financial markets that it can tackle another blaze in Italy, a far bigger economy also heading for economic and political crisis.

To Vima news website expressed the exasperation felt by Greeks with all their political leaders, especially Papandreou and conservative opposition leader Antonis Samaras.

The website evoked a national fear that Greece might lose its euro zone membership, and be cast adrift to survive alone with its old currency.

Despite its huge defeat, our political system won't get serious at the time when the country is threatened with complete collapse, wavering between the euro and the drachma.

Mr Papandreou and Mr Samaras agreed on Sunday on a government to save the country and are now doing whatever they can to undermine it before it even starts its work, it said.

DOUBLE DISPUTE

Adding to the confusion, conservative leader Samaras became embroiled in a dispute within his New Democracy party and a related row with the European Union.

Party political sources said some New Democracy lawmakers were accusing Samaras of giving away too much, especially when he agreed to accept austerity measures in the bailout package.

Samaras had long argued that the spending cuts, tax rises and job losses imposed by the outgoing socialist government under orders from the EU and IMF had deepened Greece's crippling recession, now in its fourth year.

A New Democracy party source refused to accept the party was the main problem, but acknowledged internal divisions since Samaras staged his U-turn on the package last week, helping to open the way for Sunday's agreement in principle.

Parts of New Democracy are causing trouble. Many party officials around Samaras don't like the way things are going, the source said on condition of anonymity.

Under pressure from party dissidents, Samaras attacked the EU for demanding written undertakings from Greece that it would stand by its promises to implement the bailout package which euro zone leaders agreed last month.

European Economic and Monetary Affairs Commissioner Olli Rehn made the demand, exasperated by Greece's record of making promises on tackling its huge debt and budget deficit and then falling short of fulfilling them.

Rehn singled out a decision by Papandreou last week to call a referendum on the bailout, a vote which might have seen Greeks reject the package because of the austerity measures tied to it. Papandreou backed down, but was forced into agreeing to make way for the unity coalition.

BROKEN CONFIDENCE

Speaking in Brussels, Rehn said Greece had breached confidence with the EU by calling the referendum. Now Brussels needed undertakings to release even the next 8-billion-euro instalment of funding for Greece under its original bailout package, pulled together last year.

This confidence needs to be mended, said Rehn. Finance ministers of the euro area expect that there is ... a written commitment, a written confirmation of the commitment of a broad-based government of national unity.

A government source said the EU wanted Samaras to sign, along with the new prime minister, finance minister, central bank governor and outgoing Prime Minister George Papandreou.

The New Democracy response was blunt. Samaras hinted in a statement he might give no written assurances because his spoken word was enough. It's a matter of national dignity ... I don't allow anybody to doubt my statements, he said.

(Additional reporting by Lefteris Papadimas; Writing by David Stamp; Editing by Louise Ireland)