Greece's beleaguered prime minister faces an escalating revolt within his own Socialist party as he manoeuvres to pass new austerity measures.
Two prominent Socialist politicians resigned their seats in parliament hours before Prime Minister George Papandreou was to announce a cabinet reshuffle, a tactic he hoped would help get new taxes and spending cuts approved before Greece was cut off from international lending.
The crisis broke out a day after anti-austerity riots in central Athens and an embarrassing collapse of negotiations to form a coalition government with opposition parties.
Papandreou is struggling to contain party dissent over a new five-year austerity package that creditors have demanded in return for continued funding from a 110 billion euro (£96 billion) international bailout.
Without the rescue loans, Greece will default on its massive debts, which would have widespread ramifications for the global economy as well as the 17-nation eurozone.
Papandreou, scrambling to pass the reforms by the end of the month, has also called a vote of confidence in parliament, expected as early as Sunday.
The resignations of two lawmakers do not affect the government's five-seat majority in the 300-member parliament, as their seats will now go to another Socialist, but it was a clear sign of deepening dissent.
Giorgos Floridis, a former public order minister who fiercely criticised the slow pace of reforms in Greece, had been tipped to join the new government but instead joined the growing ranks of sceptics.
In his resignation letter he blasted both the Socialists and opposition parties for their brinkmanship tactics.
"Unfortunately, the leaderships of the two main political parties have once again failed to rise to national circumstances, in a politically unforgivable way," Floridis wrote.
Former deputy health minister Ektoras Nasiokas also quit. Earlier this week, Papandreou's majority in Parliament was trimmed to five after another Socialist lawmaker declared himself an independent.
Although Papandreou has not indicated publicly what his new government will look like, the reshuffling is expected to be sweeping. Key figures, including the finance minister, George Papaconstantinou, could be replaced.
Papaconstantinou has drawn the ire of many Greeks for his handling of the crisis and the massively unpopular tax hikes and spending cuts demanded by the European Union and International Monetary Fund in return for the bailout loans.
EU officials have been pressing for cross-party unity on the new austerity package, which will impose more tax hikes and spending cuts, and runs two years beyond the current government's term to 2015. The bill must be passed in Parliament by the end of this month.
But conservative opposition leader Antonis Samaras has insisted the initial agreement for Greece's bailout must be renegotiated.
The ensuing turmoil in the markets has reflected waning confidence that Papandreou can get the new austerity bill through Parliament.
The austerity bill has led to widespread discontent. On Wednesday, a major rally by tens of thousands of protesters in Athens degenerated into riots. Clouds of tear gas wafted across central Athens and lawmakers had to be escorted by armed motorcycle guards past protesters into Parliament.