Greece was expected to unveil its plan on Sunday to begin laying off state workers, the most contentious part of a reform package demanded by the EU and IMF to free up loans and stave off bankruptcy.

Without the release of an 8 billion euro ($10.7 billion)tranche of an EU bailout, massively indebted Greece could run out of money to pay state wage bills within weeks.

European officials are scrambling to avert a Greek debt default, which could wreck the balance sheets of European banks, damage the prospects of the euro single currency and possibly plunge the world into a new global financial crisis.

A senior member of the ruling coalition in Germany, Europe's paymaster, said it may be necessary for Greece to abandon the euro, a prospect European governments officially reject as beyond consideration.

Negotiators from the International Monetary Fund, European Union and European Central Bank, known as the troika, have returned to Athens after walking out of talks a month ago, and have met Greek officials for the past four days.

To persuade the troika to release the loans, the government has promised to introduce new taxes, cut state wages by an average of 20 percent and reduce the number of public sector workers by a fifth by 2015.

The austerity measures are deeply unpopular, and public sector unions hope that strikes and demonstrations can wreck the Socialist government's resolve to enact them.

No part of the package is more contentious than the plan to lay off state workers -- who make up a fifth of the Greek workforce and are guaranteed jobs for life under a constitution that bans firing government employees in virtually all circumstances.

The cabinet was due to meet on Sunday evening to discuss a plan to begin layoffs by setting up a labor reserve. Under the plan, 30,000 workers would be put in the reserve by the end of this year and paid 60 percent of their salaries for a year, after which they would be dismissed.

The government has yet to announce how the programme would work, including details such as whether it would be used to push out younger workers or only to accelerate the retirement of workers already reaching pension age.

Greek officials said late on Saturday a solution was close.

We are close to a deal on the labor reserve, one senior official said after several hours of difficult talks on the issue. We want to conclude negotiations with the troika on the labor reserve by tomorrow and also approve it in a cabinet meeting tomorrow.

The troika inspectors want assurances that the plan will be implemented swiftly and will not only include civil servants close to retirement, the official said.

POOR, MIDDLE CLASS HURT

Greeks hostile to the austerity measures say the harsh cuts will deepen the impact of a three-year recession and disproportionately hurt the poor and middle class.

Labor unions hope to step up political pressure with a campaign of strikes and protests in coming weeks. The government has a majority of just four seats in parliament and could be forced into elections if a handful of lawmakers balk.

Hundreds of black-shirted anarchists marched through the capital's central Syntagma Square on Saturday, chanting slogans and carrying black and red flags. A few women among the crowd pushed children in strollers. Police hope to prevent a repeat of street battles in June when more than 100 people were hurt.

Striking civil servants have tried to block the troika talks. At one point on Friday, transport ministry workers prevented their minister from meeting the negotiators.

Finance Minister Evangelos Venizelos told the pro-government newspaper To Vima that the loan tranche was assured because we are taking such difficult decisions and the Greek people are shouldering such great sacrifices.

But there has clearly been a shift in the views of European leaders in recent weeks, with many increasingly suggesting that bailouts may not be enough to save Greece.

The deputy leader of the Christian Social Union, one of three parties in Chancellor Angela Merkel's center-right coalition, said on Sunday Greece may be better off leaving the euro zone if it cannot restore its fiscal health.

Alexander Dobrindt told Deutschlandfunk radio that a Greek exit from the euro would be a last resort measure and Greece would find it easier to recover outside the currency bloc.

I believe it is a solution, if one wants to bring Greece back into a economically stable competitive condition, that this would be done outside the euro zone, he said.

The finance minister of Slovakia said on Saturday that policymakers need to be ready for the impact of a Greek bankruptcy if the troika concludes that default is inevitable.

We are now waiting for results of the IMF and EU inspectors. This should be the basis for a clear assessment whether Greece's position is sustainable, or whether bankruptcy and a write-off of part of the debt are inevitable, Ivan Miklos told Czech daily Lidove Noviny.

In case we draw a conclusion that the situation in Athens is not sustainable, we must say how we are prepared for a coordinated bankruptcy and how we will prevent further contagion.

(Writing by Peter Graff)

Germany International Monetary Fund