Thousands of Greek civil servants marched through Athens during a 24-hour strike on Wednesday which shut schools and grounded flights, protesting the government's plans to freeze wages.

Riot police briefly fired teargas at dozens of demonstrators who tried to break a security cordon in central Athens but the protests were mostly peaceful.

Some 5,000 members of the ADEDY public sector union marched through rain to parliament waving banners reading "We won't pay for the crisis". The 500,000-strong union wants the government to scrap emergency measures including a wage and pension freeze.

"These measures are unjust and we will continue our struggle as long as the government does not change its policies," ADEDY General Secretary Ilias Iliopoulos said, adding that his union would almost certainly join a private sector strike on Feb. 24.

Iliopoulos said 70 percent of members joined the stoppage, but many public employees appeared at ministries and schools. The government was due to release estimates later.

"Borrowing"

The spread of Greek bonds over benchmark German Bunds tightened to its narrowest since Jan. 20 as investors welcomed reports of intense EU negotiations over bilateral aid from member states for Greece.

Greece needs to borrow 53 billion euros this year. It has covered its needs until April, but then has a heavy schedule of payments of up to 20 billion euros by end-June. Analysts warn that if it runs out of money to pay state wages and pensions, the backlash will be ferocious.

Greek Prime Minister George Papandreou on Monday asked civil servants to accept bonus cuts saying they "must be the first to set an example", but instead they plan to down tools in a walkout that will be joined by air traffic controllers.

Memories still linger of weeks of violent demonstrations in December 2008, fuelled by anger at unemployment and corruption.

While no violence was expected during Wednesday's stoppage, it was seen as just the first in a series of union protests whose severity would depend on Papandreou's success in restoring faith in the economy, which he says will grow this year.

Financial markets rallied on Wednesday amid talk that the European Union could bail out Greece, but Brussels has repeatedly said the socialist government must stand firm on wage cuts and tax rises in the face of union opposition.

Some ordinary people, however, said it was too soon to dismiss efforts by Prime Minister George Papandreou, a scion of a political dynasty who won power last year, to pull Greece's finances back from the brink after years of mismanagement.

"I'm afraid low earners will be hurt but we must be patient and if the measures don't work, then people have the right to react massively," said Maria Pipikari, 29, a shipping employee.

"The prime minister didn't keep his promises and he is dipping his hands in the pockets of the poor," said Eleni Papapostolou, 46, a teacher and mother of two. "I have to cut out coffee just to get by. Ordinary people have debts too."

The public sector strike comes a day after the government unveiled measures to cut its budget deficit below the EU ceiling of 3 percent of GDP by 2012, from 12.7 percent last year -- the highest in the 16 nation euro zone.

Unions opposed the proposals to freeze public wages, slash the salary supplements many Greeks get on top of their basic pay, and replace only one in five of the people leaving the civil service.

Air traffic controllers cancelled all non-emergency flights, and main ports were shut down.

"Serious risk of spillover"

The European Commission voiced concern Tuesday that Greece's fiscal crisis could affect other parts of the 16-nation eurozone.

There is a "serious risk of spillover into other parts of the euro area," EU Economic Affairs Commissioner Joaquin Almunia told the European Parliament in Strasbourg.

Meanwhile, Euro zone countries were holding intensive talks on Wednesday about a possible financial rescue for debt-stricken Greece.

The European Commission said finance ministers of the 16 countries that share the single European currency would hold a video conference on Wednesday to discuss the issue, a European Commission spokesman said.

"First rescue"

Sources in Germany's ruling coalition said Berlin was in intensive international and domestic talks about possible aid to Greece on the eve of an EU leaders' summit set to be dominated by the debt crisis that has shaken confidence in the euro.

They said agreement on who would help Greece and by how much could be made on the sidelines of the EU summit but the German government had made no decision yet on concrete aid measures.

The premium investors charge to buy Greek government debt rather than benchmark German bonds tumbled to its lowest level in three weeks and Greek bank shares rose more than 5 percent on news that euro zone countries were working on financial support.

A senior source in Berlin's ruling coalition told Reuters on Tuesday that euro zone governments had agreed in principle to aid Athens, although the method had still to be worked out.

It would be the first such rescue in the single currency's 11-year lifetime.

"Papandreou in Paris"

Greek Prime Minister George Papandreou held talks in Paris to seek support from the second biggest euro zone economy for his drive to slash a huge budget deficit, although a French source said there was no agreement yet on aid for Greece.

The Greek government has vowed to cut the budget deficit below the EU's 3.0 percent ceiling by 2012 after it spiralled to 12.7 percent of gross domestic product (GDP) last year.

Private and public sector unions plan another show of strength with a general strike on Feb. 24.

EU leaders meeting in Brussels on Thursday with European Central Bank president Jean-Claude Trichet may well issue a statement on Greece's financial crisis, an EU source said.

Any financial assistance would likely be tied to strict conditions, but the nature and scale of a rescue remain unclear, partly because a treaty prohibition on EU bail-outs for euro zone members complicates the task.

Germany and France would probably bear the lion's share of any aid, since Italy and Spain, the other two big economies in the euro zone, are themselves under financial pressure.

Britain, which opted out of the euro, has made clear that Greece is the euro zone's responsibility.

The Wall Street Journal said Berlin was considering taking a lead role with other EU partners in offering Greece and other highly indebted euro zone countries loan guarantees in an effort to calm market fears of a default.

The newspaper said German Finance Minister Wolfgang Schaeuble had discussed the idea in recent days with Trichet.

German leaders had previously rejected any talk of a bail-out, saying Athens must do its own homework and warning of a precedent that would create moral hazard, rewarding fiscally profligate countries.

EU officials have been particularly unsympathetic to Greece since it admitted in October that its statistics were fraudulent and the 2009 budget deficit would be 12.7 percent of gross domestic product, more than twice the announced level.

Papandreou briefly talked to reporters after meeting Sarkozy, but not did take any questions and did not say whether EU allies would offer heavily-indebted Greece an aid package.

The prime minister said he had discussed an array of issues with Sarkozy.

"We are ready to take any measures in order to make this sure and guaranteed that we reach this goal," he said, speaking from the courtyard of the Elysee Palace.

He added that Greece would honour recent budget commitments it has made to it the European Union. "We are absolutely decided to make sure it is implemented in every detail," he said.

Sarkozy made no comment after the meeting.


Agencies