Greek PM drops euro referendum plan

George Papandreou opened emergency talks with his opponents today (Getty Images)

Greece's prime minister has abandoned his explosive plan to put a European rescue deal to a referendum.

George Papandreou opened emergency talks with his opponents, who performed a U-turn and agreed to broad austerity measures in exchange for a European bailout.

Mr Papandreou ignored widespread calls for his resignation and instead invited the opposition to join negotiations on the bailout.

He told an emergency Cabinet meeting that early elections would force Greece into leaving the euro, with disastrous effects for both Greece and other European economies.

Mr Papandreou sparked a global crisis on Monday when he announced he would put the latest European deal to cut Greece's massive debts - an accord that took months of negotiations - to a referendum.

The idea horrified other EU nations and Greece's creditors, triggering turmoil in financial markets as investors fretted over the prospect of Greece being forced into a disorderly default.

Two officials close to Mr Papandreou said today the referendum idea has now been scrapped, after the debt deal won support from the opposition.

Mr Papandreou spoke to conservative opposition leader Antonis Samaras in the afternoon, his office said, before a major address to his Socialist party deputies in parliament.

Speaking to his ministers, Mr Papandreou said his proposal to hold a referendum "has at least brought many people toward a rational view" of Greece's dire economic situation. Several Greek MPs had called for a coalition unity government to approve the bailout package without a referendum, but Mr Papandreou said stepping down would make things worse.

"Elections as a solution, today and at this moment, would mean a much greater danger of bankruptcy and of course exit from the euro," he said.

The drama in Greece sent immediate ripples throughout Europe.

Premier Silvio Berlusconi's government in Italy was teetering as well after it failed to come up with a credible plan to deal with its dangerously high debts, and Portugal demanded more flexible terms for its own bailout.

The European Central Bank made a surprise decision to cut interest rates by a quarter of a percentage point, to 1.25%, in an acknowledgement of the fragility of the continent's finances.

Talk of Greece also dominated the G20 summit in the French resort of Cannes, where the leaders of the world's economic powerhouses gathered to solve Europe's debt crisis, which threatens to push the world back into recession.

Mr Papandreou flew to Cannes on Wednesday, where French President Nicolas Sarkozy and German Chancellor Angela Merkel told him Greece would not get the latest funds from its existing bailout until after any referendum. They also said any referendum should be on whether Greece wants to stay in the eurozone or not.

After returning to Greece with him, his finance minister, Evangelos Venizelos, broke ranks and declared his opposition to a referendum. "Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt," he said.

Me Venizelos said the country's attention should instead be focused on quickly getting a crucial eight billion euro (£6.9 billion) instalment of international bailout funds, without which it faces bankruptcy within weeks.

Mr Papandreou said today he never intended to hold a referendum on Greece's use of the euro, but was simply seeking broader Greek approval for the bailout plan.

Greece's new debt deal would give the country an extra 100 billion euro (£86 billion) in rescue loans from the rest of the eurozone and the IMF - on top of the 110 billion euro (£95 billion) it was granted a year ago.

It would also see banks write off 50% of the money Athens still owes them. The goal of the programme is to reduce Greece's massive debts to the point where the country is able to handle its finances without constant bailouts.

The political drama is not over.

Mr Papandreou has called a confidence vote on his government for Friday night, and his majority was reduced to the bare minimum when Socialist MP Eva Kaili said she would not vote in favour.

The two other European governments besides Greece that have received bailouts - Portugal and Ireland - have seen their governments fall during the economic turmoil.