European banks will contribute to a multi-billion euro Greek bailout, Germany said on Friday, as talks to secure European Union and IMF aid to Athens in return for draconian budget cuts edged toward a deal.

The European Commission said negotiations on the loan package should be wrapped up by Saturday, and a spokesman said euro zone finance ministers would meet to approve it on Sunday.

Private sector involvement could make it easier for EU governments to persuade skeptical taxpayers to rescue Greece from its debt crisis.

German Vice Chancellor Guido Westerwelle compared the need for the private sector to support Athens with Berlin's planned levy on banks to insure against future bank crises.

I expect that, just as in Germany banks will participate in the consequences of the economic and financial crisis through the famous bank levy that we agreed upon in the government, so also in Europe banks will want to make their contribution and will do so, Westerwelle said.

Greece is preparing severe austerity measures to cut the deficit by 24 billion euros and unlock European Union and IMF aid of up to 120 billion euros over three years. Investors hope this will stop the crisis from sinking other fragile EU economies.

But the Greek government faces a battle with unions who have been angered by the scale of the cutbacks.

A senior banking source told Reuters that Deutsche Bank AG

Chief Executive Josef Ackermann, at the request of Germany's finance minister, was helping coordinate German private sector efforts to support the rescue package.

The consortium has already pledged to contribute between 1 and 2 billion euros ($1.3-2.6 billion), which could involve buying Greek government debt, although no formal agreement has been struck, the source said.

It was not clear exactly which banks would contribute, or in what form. Not all were enthusiastic. HypoVereinsbank chief executive Theodor Weimer said: Banks cannot and should not pick up the bill.

The idea behind the consortium is that, if markets see the private sector is taking the Greek rescue seriously, other companies may follow, helping to stabilize nervous markets.

Although political barriers remain, the rescue package is likely to win the unanimous approval required from euro zone countries for it to go ahead.

The European Commission, European Central Bank, the IMF and the Greek government will unveil Greece's austerity program on Sunday morning in Athens, euro zone spokesman Guy Schuller said.

He said the euro zone finance ministers would meet a few hours later in Brussels to approve the loan package and spell out its full size.

Germany had expressed deep reservations about bankrolling Greece because Athens misled partners over its catastrophic finances. But Finance Minister Wolfgang Schaeuble said on Friday that supporting Greece was vital to all euro members.

And that's why it's important -- not only to help Greece to prevent the Greece crisis turning into a danger for the euro -- but at the same time to fight speculation, he said.

The German government will meet on Monday to give approval to a draft law on providing loans to Athens. The government will then try to push the law through the lower house of the German parliament by Friday.

LONGER TERM DOUBTS

Despite the good short-term prospects for euro zone approval, there are still serious doubts over whether European governments will sustain their commitment to Greece in the long term, especially if Greece fails to meet its budget cut targets.

In particular, social unrest could prevent Prime Minister George Papandreou from pushing through the austerity measures.

A new opinion poll indicated 51 percent of Greeks were prepared to take to the streets to oppose the plans.

Saturday will see tens of thousands taking part in May Day protests. The public sector union called a 4-hour strike for Tuesday, on top of a nationwide strike already set for Wednesday.

Unions said the International Monetary Fund had asked Greece to raise sales taxes, scrap bonuses amounting to two months' pay in the public sector, and freeze pay for three years.

Papandreou said the measures were vital to securing aid.

Many talk about red lines. The only red line is the country's interest. Today the top priority is the survival of the nation. This is the red line, he told parliament.

Finance Minister George Papaconstantinou said Greece was determined to push financial reforms through. We will not weigh any political cost. We will not step back, he said.

German politicians have said the aid package could be worth 100-120 billion euros ($133-160 billion) over three years, against an original plan for 45 billion euros of aid in 2010.

The spread between Greek and German 10-year government bond yields narrowed by around 100 basis points.

By late morning in New York, the euro, which has lost about an eighth of its value against the dollar since December on worries about the Greek debt crisis, had risen 0.5 percent to stand at $1.3286.

Ratings agency Moody's downgraded nine Greek banks, but their shares still ended around 1.7 percent higher on average on hopes of a loan deal.

NO CONTAGION

European Commission President Jose Manuel Barroso said on Friday the Greek rescue package would prevent the crisis from spilling over to other countries.

It is about safeguarding the overall financial stability of the euro zone, he said.

Economists said if euro states failed to engineer a Greek bailout that calmed markets, they could end up footing a bill of half a trillion euros ($650 billion) to save several nations.

Markets have worried that countries like Portugal and Spain -- whose debts were downgraded by ratings agencies this week -- could be threatened unless they tackle their deficits swiftly.

Portugal's main opposition leader, Pedro Passos Coelho, said his Social Democratic Party (PSD) supported the government's austerity plan and hoped to agree a pact that may allow a cut of this year's budget gap by an additional 1 percentage point.

His comments were likely to reassure investors concerned about Lisbon's ability to tackle its deficit.

In Spain, unemployment rose to a record high above 20 percent in the first quarter, stifling attempts to recover from recession, but Economy Minister Elena Salgado said Spanish debt was under control and Madrid would not have to seek aid.

The Greek talks are being closely watched for details on whether the aid will start in time for Greece to refinance an 8.5-billion-euro bond coming due on May 19 and if the deal will be big enough to handle Athens' 300-billion-euro debt pile.

The planned austerity measures include cuts aimed at Greece's system of public wage allowances, which often include generous extra pay for activities such as using computers or getting to work on time.

These are primarily meant to keep base salaries and pensions low, and a 5-15 percent cut could save the state about 300 million euros a year.

More measures are bound to meet resistance from Greeks facing a sharp decline in living standards.

Armageddon is coming, the conservative daily newspaper Eleftheros Typos said. ...The lenders are setting the terms, and they are incredibly tough. At least for three years, they will drink our blood.

(Writing by Dominic Evans and Kevin Liffey)

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