European governments have agreed in principle to help heavily indebted Greece, a senior German coalition source said on Tuesday, in what would be the first rescue of a euro zone member in the currency's 11-year history.

The decision on help for Greece has been taken in principle within the euro zone, said a source in the German coalition government who has knowledge of the negotiations.

Various options were under consideration and no final decision had been taken but the most likely possibility was to offer bilateral help, the source said.

The comments were the strongest signal so far that European Union economic heavyweight Germany may be ready to step in to stave off a crisis of confidence in the 16-nation currency bloc that has roiled markets around the globe.

German government spokesman Ulrich Wilhelm called reports that a decision had already in effect been taken unfounded, but the newspaper Financial Times Deutschland also said Germany was preparing an aid package for Greece.

The Wall Street Journal said Germany was considering taking a lead role in a plan with its European Union partners to offer Greece and other euro zone countries loan guarantees in an effort to calm market fears of a debt default.

German Finance Minister Wolfgang Schaeuble discussed the idea in recent days with European Central Bank President Jean-Claude Trichet, the WSJ said in a report on its website, quoting a person familiar with the matter.

The reports came two days before a European Union summit expected to discuss the Greek debt crisis. Outgoing EU Monetary Affairs Commissioner Joaquin Almunia fueled speculation of a rescue by urging European leaders to help Athens in exchange for drastic fiscal reforms when they meet on Thursday.

I would like the leaders of Europe to say to the Greek authorities that in exchange for the efforts you are making, you are going to get support from us, Almunia told the European Parliament.

You don't get support for free. That would simply lay the foundations for further imbalances and crisis. We have got instruments to provide that in exchange for clear commitments that they will meet their responsibilities, Almunia said.

Portuguese Finance Minister Fernando Teixeira dos Santos, whose country has also been hit by the market turmoil, told Reuters he was sure action would be taken to help Greece if it proved necessary, even though the EU treaties did not foresee such assistance.

EURO PERKS UP

The euro, which fell to near 9-month lows against the U.S. dollar last Friday amid worries about Greek, Portuguese and Spanish finances, rose on Monday to highs near $1.38 following the comments from the German source. It fell back slightly on the spokesman's denial.

The spreads of Greek bond yields over benchmark German issues also narrowed sharply on the day as did the cost of insuring Greek debt against default.

Fiscally fragile euro-zone countries like Greece, Portugal and Spain are under intense pressure to rein in huge budget deficits, aggravated by a steep economic downturn and billions of euros in stimulus spending.

Their financial woes have hit investor confidence in the European single currency bloc and even sparked speculation that a country could be forced out of the euro area.

Greece's troubles are expected to dominate the informal summit of EU leaders on Thursday that was originally intended to focus on a long-term growth strategy for the bloc. ECB president Trichet will also attend the EU summit.

PRESSURE CONTINUES

Meanwhile, EU policymakers and credit ratings agencies kept up pressure on Athens to deliver on its deficit-cutting plan.

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

On Tuesday, Finance Minister George Papaconstantinou outlined plans to freeze public sector wages and overhaul the country's tax regime in a drive to consolidate the budget.

French Economy Minister Christine Lagarde said she was confident Greece would deliver on its fiscal program, adding that EU partners were watching the situation carefully.

Fitch Ratings said markets would not wait long for Greece to address concerns about the long-term sustainability of its public finances.

They need to address those concerns now because ultimately the market won't wait until it becomes blatantly obvious that the situation is unsustainable, Chris Price, Fitch analyst for Greece, said on a conference call.

ECB Governing Council member Ewald Nowotny said the central bank could not help Greece due to its no-bailout clause and any help from member states would be a political decision.

Greek trade unions have threatened to intensify strikes in protest at the government's wage and tax changes. Greek public sector workers plan a one-day stoppage on Wednesday. Portugal's largest public administration workers union announced a one-day strike for March 4 over a planed wage freeze.

The threat of social unrest in Greece, Spain and Portugal has fueled concern that governments may struggle to push through their austerity plans.

(Writing by Noah Barkin and Paul Taylor; Editing by Ron Askew)

Germany Portugal European union