Portugal's parliament is expected to reject government austerity measures on Wednesday, setting the stage for the possible collapse of the minority Socialist administration a day before a European summit.
Prime Minister Jose Socrates has said he will resign if the plan is defeated. He has said its rejection would force the debt-laden country to follow Greece and Ireland and seek an international bailout, which he opposes.
All opposition parties have proposed resolutions calling for the rejection of the measures, which reduce pensions and state spending.
The main opposition Social Democrats, who have previously backed austerity, have begun talking about a snap election.
If all these positions that now seem irreversible are confirmed, then yes (the government will step down), Francisco Assis, Socialist bench leader in parliament, told reporters after a late-night party meeting.
The prime minister does not want to resign, but he cannot govern against his convictions, Assis said, blaming the Social Democrats for opening a political crisis at the worst moment despite the government's willingness to negotiate a solution.
The Socialists have 97 of parliament's 230 seats and have now no allies on whom they can rely. The plan needs at least 116 votes to pass.
A last-minute intervention by President Anibal Cavaco Silva in the crisis appears less likely after he said late on Tuesday his room for maneuver to act preventively was limited.
Socrates is due to meet the president for a weekly scheduled meeting at 1900 GMT after parliament starts a debate at 1500 GMT to be followed by a vote on the resolutions.
The government had hoped to obtain support for its plan before Thursday's EU summit, which is expected to approve a beefed-up euro zone rescue fund.
BOND YIELD UP
Portuguese markets slumped on Thursday as investors grew more nervous.
Portuguese benchmark 10-year bond yield rose to 7.77 percent on Wednesday from Tuesday's 7.68 percent and the spread over safer German Bunds rose 7 basis points to 450 bps. Many economists see borrowing costs above 7 percent as unsustainable and say Portugal will have to resort to the rescue mechanism.
Shorter dated bonds were harder hit, with Portugal's five-year bond yield at a euro lifetime high of 8.2 percent.
The stock market was down 1.6 percent.
If these measures are not agreed it seems more and more likely that Portugal will need some kind of support, said Charles Diebel, head of market strategy at Lloyds Bank.
Is this already reflected in the price? To a large degree yes it is, but there are also good causes for concern that this is not going to stop here.
The Social Democrats, ahead in opinion polls, are broadly committed to reducing the budget deficit.
The constitution stipulates that the country can hold a snap election at the earliest 55 days after one is called by the president. Meanwhile, the outgoing government remains in office as a caretaker administration with limited powers.
My worry is the period of inaction before a new government takes over, said Silvio Peruzzo, an economist at RBS in London. He did not expect decision-making to come to a standstill, preventing the country seeking a bailout if necessary.
Political analyst Antonio Costa Pinto said a caretaker government would have its hands tied.
Although a caretaker government cannot take major autonomous initiatives, it could take a decision on resorting to aid if it is backed by parliament, Costa Pinto said.
Whatever the outcome, opposition to austerity may increase as the Portuguese face lower wages, higher taxes and the country returns to recession.
Large protests have been held against austerity in the past two weekends and on Wednesday the country's train operators went on strike to demand higher wages, creating traffic chaos around Lisbon as commuters were forced to take their cars to work.
(Additional reporting by Axel Bugge)