Greek unions pledged on Monday to fight austerity measures with a public sector strike this week, the first test of the government's commitment to cut deficits and a ballooning public debt which has shaken the euro.
Wednesday's planned 24-hour strike comes as Prime Minister George Papandreou puts the finishing touches to details of a deficit-reduction plan, endorsed by the European Commission last week to pull Greece's finances back from the brink.
His socialist government has promised to tighten one of Europe's leakiest tax systems and freeze public sector wages in a bid to slash Greece's deficit from 12.7 percent in 2009 to below the EU's 3 percent ceiling by 2012.
The emergency tax reform and wages bills are expected to be unveiled this week and become law by the end of the month, but details revealed have angered Greece's powerful unions.
We are fighting so that the working people don't get to pay for the crisis, public sector union ADEDY said in a statement ahead of a news conference to outline their demands. We demand a pay increase ... a fair tax system.
Finance Minister George Papaconstantinou, who took part in an impromptu cabinet meeting on Monday, said the raft of wage cuts and revenue reforms would involve lowering the top tax rate, as the government seeks to shield the poorest Greeks.
The 40 percent tax rate will be applied on income levels that are lower than what is the case today, but there will also be intermediate rates that will provide relief for low and middle incomes, he told Ta Nea newspaper.
He said that as a result of the tax changes, the biggest burden would be felt by a small percentage of tax payers as 95 percent of earners report incomes below 30,000 euros a year.
Worries over Greece's fiscal woes have battered its bond and stock markets, driving its borrowing costs sharply higher and helping to drive the euro currency to 8-1/2 month lows against the dollar.
The government's response to this week's strike will be closely watched by international markets, keen to see whether Greece can contain a fiscal crisis that has already spread to euro zone periphery countries, Portugal and Spain.
We are making a huge effort to protect our economy from speculation and a lack of credibility, which have led to adverse borrowing terms, Papaconstantinou told the paper.
European ministers told their counterparts at a Group of Seven meeting on Saturday in northern Canada that they would make sure Greece sticks to its budget-cutting plan, but the pledges failed to reassure currency markets and the euro lost more ground on Monday.
(Writing by George Georgiopoulos and Daniel Flynn; Editing by Andy Bruce)