The Greek parliament was set to adopt a harsh austerity plan on Thursday in the face of violent unrest, as markets looked to the European Central Bank to prevent debt crisis engulfing the euro zone.
The euro and world stocks fell for a third straight day as investors fled risk amid growing signs that Athens' woes are spreading to other weak euro economies, testing whether European governments are willing to extend a bailout devised for Greece alone.
The cost of insuring Portuguese and Spanish debt as well as Greek debt against default leapt to new peaks before a closely watched auction of 5-year Spanish bonds. Yields jumped for the auction but there was no shortage of demand.
European policymakers' attempts to talk down the risk of contagion and scare off "speculators" had little impact on traders unimpressed by the EU's slow and disjointed response to the unfolding crisis.
"There's no let-up in concerns that the euro zone debt crisis could continue to worsen and as a result equity markets across the globe remain under pressure," said Ben Potter, analyst at IG Markets.
All eyes were on ECB President Jean-Claude Trichet to signal what the world's second most powerful central bank can do to pull the euro zone out of a vicious cycle of soaring borrowing costs, dwindling growth prospects and sovereign debt downgrades.
Mr. Trichet will face questions on whether the ECB may reverse its policy and buy euro zone government bonds or try other measures to keep credit markets open to Portugal and Spain at affordable rates while Greece receives EU/IMF emergency loans.
European Council President Herman van Rompuy, who will chair a special euro zone summit on the crisis on Friday evening, was the latest top EU official to try to erect a verbal firewall, saying the situation of Portugal or Spain had nothing to do with Greece's problems.
"What I now see are totally irrational movements on the markets set off by unsubstantiated rumours, for instance yesterday with Spain, but also as regards Portugal," he said.
The Greek government vowed not to retreat a single step from unpopular wage and pensions cuts and tax rises despite violence in Athens that claimed three lives on Wednesday when rioters set fire to a bank and fought running battles with police.
"We will press ahead, even if we have to walk alone, without the backing of other parties," Finance Minister George Papaconstantinou told parliament.
The Socialist government has a comfortable majority but the main conservative opposition party has vowed to vote against the austerity bill, dashing hopes of political consensus which analysts said would have improved the chances of implementation.
Greek newspapers condemned the violence caused the deaths of three bank employees, including a pregnant woman. Many said it was now up to Greece's leaders to set the country on a course the people could follow.
"Whether we self-destruct, whether we go bankrupt, depends now on our leaders, but also on all of us," said centre-right daily Kathimerini.
Police said in a statement that 41 people had been injured in clashes which were instigated by hundreds of black-hooded anarchists, but also drew in ordinary protesters.
The country's main public sector union ADEDY and private sector union GSEE planned to demonstrate outside parliament ahead of the expected vote late on Thursday on the bill. It is designed to save an extra €30-billion to reduce a bloated deficit that stood at 13.6 per cent of economic output in 2009.
The euro sank to its lowest level in 14 months, below $1.28. It has fallen 10 per cent since the start of the year as Greece's fiscal troubles escalated.
Concern that Greece will be unable to make all of the deep budget cuts agreed on Sunday with the EU and IMF because of social unrest is one of the drivers of the euro zone turmoil.
European Commission President Jose Manuel Barroso, speaking by video link to a conference in Berlin as the German parliament deliberated on the Greek rescue, said he was sure all 16 euro zone countries would approve the loan package.
He warned there would be a negative impact on the whole euro area unless there was a unanimous decision in support of aid. German Vice-Chancellor Guido Westerwelle, whose pro-business FDP party has been critical of helping Greece, said Germany was on track for a broad parliamentary majority in favour of the plan.
Conservative Chancellor Angela Merkel, accused by many analysts of aggravating the Greek crisis by foot-dragging, told parliament on Wednesday the success of the rescue package would determine "nothing less than the future of Europe - and with it the future of Germany in Europe".
Troubles in the eurozone drove U.S. treasury debt prices higher as investors fled to safe havens, including gold and the U.S. dollar, worried the crisis could cross the Atlantic and thwart the U.S. recovery.
Greece's only hope of avoiding bankruptcy is to take money from a joint EU and International Monetary Fund rescue package, the finance minister said Thursday during a heated parliamentary debate.
Greece has to impose harsh austerity measures, including slashing salaries and pensions and increasing taxes, in order to get money from the three-year package, which will provide the country with loans from other euro zone countries and the IMF. But the cuts have sparked outrage, with an estimated 100,000 people spilling onto the streets of Athens during a nationwide general strike Wednesday to protest the measures.
Demonstrations quickly turned violent, with protesters clashing with police in extensive riots. A man and two women died when they became trapped in a burning bank torched by protesters.
Finance Minister George Papaconstantinou said the government had no choice but to impose the austerity measures, which were being rushed through parliament to a vote later Thursday.
Mr. Papaconstantinou said the draft bill was tabled as urgent legislation because the country was two weeks away from default, with €9-billion worth of bonds maturing on May 19.
"The state's coffers don't have that money," Mr. Papaconstantinou said. "Because today ... the country can't borrow it from the international market. And because the only way for the country to avoid bankruptcy and suspension of payments is to take the money from our European partners and the International Monetary Fund."
But in order to receive the money, Greece must agree to a three-year austerity program, he added.
"The government has the responsibility of implementing the most difficult financial measures ever taken in this country. It is a program which requires effort and sacrifice, and obliges us morally and politically to succeed," Mr. Papaconstantinou said, describing the rescue package as "our country's last hand."
"We are asking for loans from countries that also have deficits and from countries that are also the subject of speculative attacks. And for those to be granted, we must persuade them that we are putting our house in order," the minister said.
- With files from the Associated Press