Coalition talks and rumour PM will quit as riots over cuts rock Greece

Greece's beleaguered government was in power-sharing talks last night with the opposition conservatives and negotiating the resignation of prime minister George Papandreou.

The move is being seen as a last-ditch effort to ensure approval for austerity measures meant to avoid bankruptcy.

While the talks continued, riots against proposed new cutbacks ripped through central Athens. The main square outside the parliament building was blanketed with tear gas after trouble broke out following a mainly peaceful rally by more than 25,000 people. Officials said 36 police officers and 30 civilians were injured in the clashes.

Mr Papandreou's left-wing government has faced internal party revolt over a new austerity package upon which hinges an international bailout to avoid Greece defaulting on its debts and plunging the eurozone into a new crisis.

Yesterday's upheaval triggered a sell-off in global financial markets as investors worried that a default in Greece could hurt banks in other countries in a chain reaction experts predicted would be catastrophic. Yields on the country's ten-year bonds reached new record highs, spiralling to 18.4 per cent.

Markets are not confident that Mr Papandreou could win the vote in the 300-seat parliament, where his majority was trimmed to five on Tuesday after one of his MPs declared himself an independent. Another MP has said he will not support the bill, set to be voted on before the end of June.

European officials have pushed for cross-party support for the measures as they extend to 2015, two years beyond the government's term in office.

Under such pressure, Mr Papandreou and conservative party leader Antonis Samaras discussed the creation of a power-sharing government to deal with its crippling debt crisis during a telephone conversation, an opposition party official said. The official said the conservatives' conditions for participating in a potential grand coalition were that Mr Papandreou steps down as prime minister, and the new government renegotiate the bailout.

An official close to Mr Papandreou said he would be prepared to discuss a "government of mutual consent" and could agree to step aside as part of a long-term deal. He denied that Mr Papandreou had offered his resignation.

Several conservative MPs publicly backed the idea of a change of stewardship.

"The most important member of a ship's crew is the captain, and the captain has to go," conservative MP Theodoros Karaoglou said.

"If we joined forces, we could go to our (creditors] together to negotiate and the results of course would be better." The new bill for cuts worth €28 billion (24bn) must be passed if Greece is to continue drawing on its rescue loans.

Yesterday's riots broke out and lasted several hours after large crowds gathered outside parliament and as unions held a general strike. Riot police fired volleys of tear gas to push back protesters who were throwing stones and firebombs.

Caf tables and chairs lay overturned in the city's main Syntagma Square as rubbish bins burned. Heavy clouds of tear gas hung over the square and side streets. The choking chemicals wafted as far as the presidential mansion behind parliament, where Mr Papandreou met president Karolos Papoulias to brief him on development.

Mr Papandreou's popularity has been plummeting amid internal party strife. But the new austerity package must be passed if Greece is to avoid bankruptcy. It has survived for the past year on a €110bn bailout from the European Union and International Monetary Fund.