Germany set tough terms on Monday for Greece to secure emergency aid, increasing uncertainty over a financial rescue that pushed the cost of insuring against a Greek debt default to a record high.

Greece's borrowing costs also rose to a 12-year peak, its bank stocks dropped and the euro fell across the board because of investors' concerns that the aid will not come in time to avert the euro zone's first sovereign debt default.

Concern over sovereign credit risk also pushed the cost of insuring Portugal's debt to new highs, underlining fears that it could be the next euro zone state to suffer a debt crisis.

Chancellor Angela Merkel, who faces public resistance to any aid for Greece, did little to ease worries over the terms and implementation of the 45 billion euro ($60.49 billion) EU-IMF aid package which some leaders suggest may have to be bigger.

We need a positive development in Greece together with further savings measures, Merkel told reporters in Berlin.

Germany will help if the appropriate conditions are met. Germany feels an enormous obligation toward the stability of the euro ... If Greece is ready to accept tough measures, not just in one year but over several years, then we have a good chance to secure the stability of the euro for us all.

The backing of Germany, Europe's biggest economy, is vital for any aid package but Merkel fears her party could lose a regional election on May 9, depriving her coalition government of its majority in the lower house of parliament.

Her finance minister, Wolfgang Schaeuble, said Berlin aimed to free up financial support for Greece before May 19, when Athens has to refinance an 8.5 billion euro bond.

He also said Germany may be able to finalize a law on May 7 to grant Greece financial aid, and cautioned that any failure by Athens to refinance its euro bond on May 19 would have unforeseeable consequences.

Athens is now in talks with the European Union and International Monetary Fund on additional steps to get the aid flowing in time to meet the May 19 debt deadline.

Greece will announce new policy measures after the conclusion of its talks with the EU and IMF officials, Finance Minister George Papaconstantinou said on Monday.

INVESTORS NOT APPEASED

But his comments were not enough to appease investors who are worried that Greece could be the first euro zone country to default.

The market wants to see the cash laying on the table, not in a coffer beside the table, said David Schnautz, strategist at Commerzbank in Frankfurt.

In another complication, Germany's opposition Social Democrats said they would not back an accelerated parliamentary process to approve aid for Greece.

Saddled with huge debt and a swollen deficit, Greece bowed to pressure from markets on Friday and formally requested aid, triggering what could be the first financial rescue of a member of the 11-year-old single currency bloc.

Underlining the fears of contagion to other heavily indebted members of the euro zone, and also concerns about the damage the crisis could do to the EU's standing, France and the European Union executive called for rapid action to help Greece.

President Nicolas Sarkozy and European Commission President Jose Manuel Barroso said after talks in Paris that it was important to counter speculation against Greece in order to ensure the stability of the euro zone.

Athens has already announced billions of euros in budget cuts, including tax hikes and reductions in public sector wages, setting off violent protests and strikes.

Greek media reported EU and IMF officials had proposed over a dozen possible steps to slash public sector costs and boost competitiveness.

The first such measure -- allowing non-Greek cruise ships to moor at multiple Greek ports without hiring Greek crews -- was announced last week and prompted a 24-hour strike by dockers on Monday.

CONCERN OVER PORTUGAL

Financial markets sent a warning by pushing the cost of insuring Greek and Portuguese government debt against default to record highs.

Five-year Greek credit default swaps were last at 702.8 basis points, having hit a session high of 713 basis points, according to CMA Datavision. The price means it costs 702,800 euros to ensure 10 million euros worth of debt against default.

The Greek crisis has started to spread to the rest of the periphery and Portugal seems to be next in line. The situation there is less urgent than in Greece, but the medium-term outlook is challenging, said Darren Williams, senior economist at Alliance Bernstein.

Unless Europe's leaders can draw a line under the situation, Portugal could face an uncomfortable period.

Greek Finance Minister George Papaconstantinou said on Sunday talks on the aid had gone well and he was confident Athens would secure help in May to finance its public debt.

But Canadian Finance Minister Jim Flaherty said the package would end up being more than had been said previously.

An EU-IMF support package of 45 billion euros would only fill liquidity needs of the first year. A multi-year package of 90 billion euros could provide Greece the breathing space to implement the fiscal adjustment, Barclays Capital said.

The Greek/German 10-year bond yield spread climbed at one point to 680 basis points, up from Friday's settlement close of 588 bps, matching levels last seen in February 1998.

Spreads against Bunds widened across the euro zone periphery, with the Italian spread moving to 99 bps, its widest since July 2009.

Greece needs 30-40 billion (euros) this year. They need the same amount for each of the following two years. The aid is very much a stop-gap and it's far from certain that everyone is going to support it, said Nigel Rendell, an emerging markets strategist at RBC.

(Additional reporting by George Georgiopoulos, Renee Maltezou and Ingrid Melander in Athens; Ilona Wissenbach in Luxembourg and Emelia Sithole-Matarise in London; writing by Timothy Heritage, editing by Toby Chopra/Susan Fenton)

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