Greek Government on the Brink of Collapse

Greek government teeters on the verge of collapse while Papandreou waits to pass euro zone bailout.

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ATHENS (Reuters) - The Greek government teetered on the brink of collapse Thursday, with the opposition and some government lawmakers demanding a caretaker administration to force through approval of a euro zone bailout, the nation's only financial lifeline.

Lawmakers from both sides of Greek politics called on Prime Minister George Papandreou to scrap his plan to let voters decide on the 130 billion euro bailout in a referendum, but a source in his office denied that he had resigned. [See a collection of political cartoons on the economy.]

Papandreou's surprise referendum announcement Monday raised an uproar as a rejection of the bailout, which includes yet more austerity measures for the long suffering Greek electorate, would unravel the euro zone's plan for tackling its wider debt crisis, and cut off international funding for Greece.

Conservative leader Antonis Samaras led calls for Papandreou to go. "I'm asking for the formation of a temporary, transitional government with an exclusive mandate to immediately hold elections. And the ratification of the bailout deal from the current parliament," he said in a statement.

"At this point, which we have reached because of the policies of the government, the new loan agreement is unavoidable. And it must be secured," Samaras said.

Until now Samaras has consistently opposed the austerity policies demanded in the bailouts, including the latest deal which euro zone leaders agreed only last week. [Read EU Leaders Reach Deal on Greece, but Worries Remain.]

A spokesman for the New Democracy party of Samaras said a transitional government should not be composed of party politicians. He declined to elaborate.

However, the idea appeared to be gaining ground within Papandreou's own socialist party PASOK.

A small group of senior PASOK lawmakers are preparing a proposal for a coalition government headed by former European Central Bank Vice President Lucas Papademos, a Greek, party sources told Reuters.

Government officials said Papandreou, who also called a vote of confidence in his government for Friday, was not resigning and would await the result of talks with New Democracy.

"There is no resignation by the prime minister. He will speak, as scheduled, in parliament later Thursday," one official told Reuters.

Finance Minister Evangelos Venizelos broke ranks with Papandreou, coming out against holding the referendum after a bruising meeting with the German and French leaders, who made clear that Greece would not receive a cent more in aid until it votes to meet its commitments to the euro zone.

"REFERENDUM IS DEAD"

Chaos over Greece's role in the euro zone swept financial markets with early losses in stocks and the euro turning to gains on hopes Athens might ditch its referendum plans.

The Greek stock exchange rose 5 percent on speculation the referendum would be abandoned, with the index of bank shares soaring 15 percent. World stocks as measured by MSCI were flat after earlier being sharply lower.

In Europe, the FTSEurofirst 300 lost 1 percent initially but later stood close to 1 percent higher. Earlier, Japan's Nikkei closed down 2.2 percent.

"The referendum is dead," Greek ruling party lawmaker Nikos Salayannis said on state radio.

An official at Papandreou's office said that if political parties reached an agreement on a coalition government, there was no need for a referendum.

Several PASOK lawmakers came out against the referendum and one said she would not support the government in the parliamentary vote of confidence Friday, cutting its majority for that vote to just one.

PASOK has 152 deputies in the 300-member parliament. [Read: Could the Crisis in Europe Drag Down the U.S.?]

Lawmaker Eva Kaili announced she would stay in the party but refused to support the government in the confidence vote expected late Friday, meaning Papandreou could count at most on the support of 151 deputies.

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