The head of the European Commission challenged German Chancellor Angela Merkel to rise above domestic politics and agree on a financial safety net for debt-stricken Greece to help preserve European monetary union.

Greece's deputy prime minister meanwhile accused Berlin of allowing its banks to take part in a deplorable game of speculating on Greek bonds while German exporters profited from a weaker euro due to Athens' budget problems.

Jose Manuel Barroso told a German newspaper that European Union leaders must decide at a summit on Thursday and Friday on a support mechanism for Greece or risk harm to their common currency, noting the euro's stability was in Germany's interest.

We can't carry on as we are, as this would threaten the stability of the euro zone and encourage speculation, Barroso, president of the European Commission, told Monday's business daily Handelsblatt.

A spokesman for Merkel insisted that the issue of aid for Greece was not on the summit agenda, but Barroso's spokeswoman said the EU chief was in regular contact with the chancellor, adding: He is hopeful ... that an agreement can be reached.

Underscoring Barroso's warning, the euro slipped to a three-week low against the dollar on Monday as investors fretted over the uncertain prospect of support for Greece.

The premium on Greek debt jumped to its highest since March 1 and the cost of insuring Greek debt against default also rose.

In Athens, Deputy Prime Minister Theodoros Pangalos told a conference that unless a decision was taken quickly, then the euro will make no sense and decades of European integration could unravel.

As long as southern Europe is under fire, the euro is being shaken and falling and the conditions under which they (Germany) can win massive exports to the third world, to the rest of the world, are improving, he said.

VICIOUS CIRCLE

European Central Bank governing council member Axel Weber said euro zone countries that had lived beyond their means such as Greece, Italy, Spain and Portugal must knuckle down to tough economic reforms.

More profound and far-reaching changes have to be undertaken in countries that have lived beyond their means and thereby driven divergences within the euro area, the head of the German Bundesbank said in a speech in Copenhagen.

ECB President Jean-Claude Trichet told the European Parliament that any help for Greece should take the form of a loan with very stringent conditions, not a subsidized soft loan.

Greece's central bank reported that the 2009 budget deficit hit 12.9 percent of national output, even higher than the new Socialist government announced when it doubled its predecessor's estimate to 12.7 percent in October.

The Bank of Greece said the economy had fallen into a vicious circle, with gross domestic product seen shrinking by 2 percent this year after a similar slump last year, and the only way out was the drastic reduction of the deficit and debt.

Barring a last-minute compromise, Barroso's comments put him on a collision course with Merkel, who faces fierce opposition to any bailout ahead of a key regional election in May in which her center-right coalition's upper house majority is at stake.

She repeated on Sunday that Greece, which has imposed stiff austerity to cut its budget gap, did not need money for now.

That's why I'd urge us not to stir up turbulence in the markets by raising false expectations for Thursday's council meeting, Merkel told Deutschlandfunk radio.

An FT/Harris poll in Monday's Financial Times showed 62 percent of Germans oppose their government helping Greece with its budget deficit, while only 20 percent are in favor.

One-third of Germans think Greece should be asked to leave the euro, while 40 percent believe Germany would be better off outside the currency bloc.

Any financial support for Athens would likely be challenged in the German Constitutional Court, which set strict conditions barring transfers to other states in the monetary union.

Given the daunting political and legal hurdles, Merkel aides have suggested Greece may have to turn to the International Monetary Fund if it needs help.

Her spokesman hinted at a possible joint euro zone/IMF mechanism, saying: In case of such an emergency arising ... financial co-assistance from the IMF is, for the chancellor and the government, definitely a point for discussion.

The chairman of the Eurogroup of finance ministers of the 16-nation single currency area, Jean-Claude Juncker, told the European Parliament a twin-track approach involving both the euro zone and the IMF was possible, based of European rules.

Greece is not on the verge of bankruptcy, he said. But I will say Greece will not be abandoned if we see Greece needs euro zone assistance. We will not abandon Greece.

Private economists say clarity is needed quickly to make Greek borrowing costs more manageable.

Unless there is a major change of heart in Berlin, it seems increasingly likely that Greece could be forced to turn to the IMF for assistance, said Ben May of Capital Economics. After all, the only way that bond yields will return to more normal levels is if Greece gets some kind of explicit assistance.

Barroso appealed to Germany's interests as the biggest economy in securing a stable single currency area, which is its number one export market.

Other euro zone states backed his call for an agreement this week. The foreign ministers of Italy, France and Austria called for a compromise before or at the summit.

The new head of Greece's PDMA debt agency last week revised down the amount that Athens needs to borrow by the end of May to 16 billion euros. Petros Christodoulou said 23 billion euros of Greek debt falls due from April 19 to May 23, but the government has a positive cash balance of around 7 billion euros.

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