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Greek government in power-sharing talks amid riots

Greek Prime Minister George Papandreou offered today to step down and make way for a national unity government if the opposition agreed on a clear plan on how to proceed with reforms, government sources said.

Papandreou must push through a new five-year campaign of tax rises, spending cuts and sell-offs of state property to continue receiving aid from the European Union and International Monetary Fund and avoid default.

"Papandreou told (opposition leader Antonis) Samaras that if there is agreement on specific targets, reforms and commitments for the big changes that must take place, then he could agree on a government in which he would not be prime minister," a government source said.

"If there is no agreement he intends to stay on as the elected prime minister of the country to continue the efforts to bring Greece to a new age so that Greeks will never have to live again what they are going through now," the source said.

But a source in Samaras' New Democracy party said the conservatives would only take part in such a government if it renegotiated the EU/IMF bailout and Papandreou resigned.

"We told the prime minister... that we would accept a government of wider cooperation on two conditions: That Papandreou is not the prime minister, and that its target will be the renegotiation of the terms of the (EU/IMF) memorandum and the midterm fiscal plan," the New Democracy source said.

Earlier in the day, angry youths hurled petrol bombs at the Finance Ministry and tens of thousands of protesters marched on parliament to oppose government efforts to pass new austerity laws for the debt-choked euro zone state.

Unions representing half the five-million-strong workforce also launched a nationwide strike, shutting government offices, ports, schools and reducing hospitals to skeleton staff.

Papandreou not only faces public protests and resistance from a conservative opposition that has surpassed his Socialist party in opinion polls, but a few backbenchers in his own parliamentary grouping are also threatening to reject the plan.

One PASOK deputy defected yesterday, reducing the party's strength in parliament to 155 seats out of 300. Another said he would oppose the bill, making an apparently guaranteed result less certain. Most analysts still expect the bill to pass.

Thousands of activists and unionists converged on the central Syntagma square on the parliament's front steps to try to stop lawmakers from entering to debate the bill in committee that they hope to pass by the end of the month.

Stun grenades boomed around the square and plumes of smoke rose from burning garbage bins as police fired tear gas and fought running skirmishes with scores of youths who fought back with rocks and long clubs, Reuters witnesses reported.

"We want them out. Obviously these measures are not going to get us out of the crisis," Antony Vatselas, a 28-year-old mechanical engineer, crying from tear gas. "They want only us to pay for it. And they are doing nothing. I want the debt to be erased. If this doesn't happen, there is no exit for Greece."

One group hurled petrol bombs and clashed with police at buildings housing the Finance Ministry, also on the square. Reuters witnesses saw flames in front of an entrance to the main building and a similar clash a few buildings down.

The vast majority of the diverse crowd - which included union workers, political party members, pensioners, and a wide array of Greeks upset at the new austerity measures - only shouted at the parliament building and remained peaceful.

"Thieves, traitors!" many chanted. "Where did the money go?"

Police said seven protesters and two officers were slightly injured and they had detained 40 people. They said the crowd numbered around 30,000 but they often underestimate numbers.

About 1,500 police closed a large part of the city centre and created a corridor to hold back protesters as lawmakers drove up to the building in official limousines.

The new austerity package foresees 6.5 billion euros ($9.4 billion) in tax rises and spending cuts this year, doubling measures agreed with bailout lenders that have pushed unemployment to a record 16.2 percent and extended a deep recession into its third year.

The plan includes new luxury taxes, a crackdown on tax evasion and tax rises on soft drinks, swimming pools, restaurant bills and real estate. The euro zone member's 750,000-strong public work force would be cut by a fifth.

With those and other measures worth total savings of 28 billion euros through 2015, it also aims to raise 50 billion euros by selling off state-owned firms.

Political analysts said the strong public outcry had raised pressure on ruling party deputies. Failure to push through the measures would put Greece in default and had the potential to shock global markets, they said.

"The government's medium-term fiscal plan will pass," said economist Gikas Hardouvelis at EFG Eurobank. "If it doesn't, the impact on global markets will be significant."

Papandreou had earlier appealed for national consensus on the laws, on which hang the EU and IMF release of a further 12 billion euros in aid next month that Athens needs to pay off maturing debt or face default.

Yesterday, euro zone finance ministers failed to reach agreement on how private holders of Greek debt should share the cost of a new bailout for Athens worth an estimated 120 billion euros before a June 23-24 summit.

The European Central Bank opposes such a move, saying that if such participation is involuntary it could be deemed default that could shock markets and put weaker euro states at risk.

The lack of agreement pushed the cost of insuring Greek debt against default to a new record high on Wednesday, while shares in Greek banks fell 7 per cent on fears of political uncertainty.

The PASOK deputy who defected said he could not back the package. "You have to be as cruel as a tiger to vote for these measures. I am not," George Lianis said in a letter to Parliament Speaker Filippos Petsalnikos yesterday.

Another PASOK member said he would vote against it. But analysts said the party, which still holds a majority, would pass the package by the end of the month before working on another set of laws on how to implement it.

"It is inconceivable that politicians will lead the situation to early elections without having secured the fifth installment of the bailout," said Alpha Bank economist Michael Massourakis. "I think that at the final moment they will act with prudence and pass the mid-term plan."