Debt-stricken Greece appealed to its European partners and the IMF for emergency loans on Friday, yielding to overwhelming market pressure to set in motion the first financial rescue of a member of the euro zone.

Prime Minister George Papandreou requested the 45 billion euro ($60.5 billion) package after investors fearing a possible default pushed borrowing costs to record levels, undermining Athens' efforts to cut its 300 billion euro debt pile.

It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created, Papandreou said in a statement broadcast live from the remote, tiny Aegean island of Kastellorizo.

The time that was not granted to us by the markets will be given to us by the support of the euro zone.

European markets rallied briefly on the announcement but fell back as investors said the long-awaited bailout, which could be the largest multilateral rescue of a country ever tried, would bring only short-term relief and could force harsher austerity on Greece, deepening its recession.

After an initial bounce, the euro was only slightly higher on the day at $1.3360 at 1600 GMT.

The Greek crisis has hit confidence in the single currency, shared by 16 of the 27 EU member states, sparking fears it could spread to fellow weaklings Portugal and Spain, and fuelling skepticism in some quarters about the euro's long-term survival.

The premium investors demand to buy Greek 10-year government bonds rather than euro zone benchmark Bunds tightened to 525 basis points, versus 611 on Thursday, before rebounding back to 570.

Torn between punishing global market forces and Greek workers protesting at painful austerity measures, Papandreou's socialist government was hesitant to press the help button, tempting investors to bet against its debt.

The last straw came on Thursday when the European Commission revealed that Greece's 2009 public deficit was even higher than feared at 13.6 percent of gross domestic product, raising the bar for this year's drastic cut. That drove Greek bond yields to 12-year highs, making the cost of borrowing prohibitive.

The decision to trigger the aid package followed a marathon seven-hour cabinet meeting, at which some ministers voiced fears of still tougher austerity conditions, Greek media reported.

This certainly does not mark the end of the crisis, there's still much further to go, said Ben May, European economist at Capital Economics. They've still got the medium-term problems of getting their public finances in order, and obviously the issue of competitiveness.

TIMING IN FOCUS

Athens continued talks with the Commission, the European Central Bank and the International Monetary Fund on Friday on a three-year fiscal program including the aid package. Time is pressing, with an 8.5 billion euro bond due to mature on May 19.

Finance Minister George Papaconstantinou said he expected the first tranche of aid to be disbursed before that date.

France said it hoped to approve its portion between May 3-6. German Finance Minister Wolfgang Schaeuble, who will meet top lawmakers on Monday to discuss fast-track parliamentary approval for loans to Greece, said Berlin would make its contribution if the EU, the ECB and the IMF agree Athens needs help.

Economists say a rescue is likely to require further European and IMF aid in 2011 and 2012 and some forecast that Greece will have to restructure its foreign debt.

French and German banks are among the biggest holders of Greek bonds, and Germany's deputy finance minister dismissed speculation about debt restructuring on Friday as unfounded.

It could take a week for the Commission and ECB to decide if Greece's request is valid and for euro zone finance ministers to then take a formal decision, the Commission said.

Everything is going to be done in such a way that the mechanism can be triggered as soon as (necessary) and as is necessary for Greece, spokesman said Amadeu Altafaj said.

He said interest on the loans -- expected to be around 5 percent from euro zone states -- would be in line with a formula worked out by euro zone finance ministers earlier this month. Because the date of the disbursement was not known yet, it was impossible to say now what the exact level would be.

Greece has said the Commission could potentially offer a bridge loan to fill a gap if the aid were not approved in time to cover its funding needs.

The timing could hardly be worse for German Chancellor Angela Merkel, facing strong public opposition to any aid for Greece, as she faces a key regional election on May 9 in which the center-right government's upper house majority is at stake.

Germany is Europe's largest economy and would be the biggest contributor to a bailout. Merkel has had to drop her initial resistance to any financial assistance for Greece and back down on demanding market rates on loans.

After a telephone call with Papandreou on Friday, she told reporters: I'm absolutely in agreement with (Foreign Minister) Guido Westerwelle that the stability of our currency has priority, on the other hand we also agree that the savings efforts of Greece have to be absolutely credible.

STICKING-PLASTER

Another question is whether the 30 billion euros pledged by euro zone states and 10-15 billion from the IMF will cover the 39 billion euros in debt Greece has coming due in the next 12 months, plus other costs forecast in the 2010 budget deficit.

In the longer-term, it's just a sticking plaster over the situation, said Daragh Maher, deputy head of forex strategy at Credit Agricole CIB.

The question remains how can Greece extract itself from its problems, and the situation remains highly uncertain.

Papandreou won an election last year pledging to tax the rich and help the poor but has come under increasing pressure since his government announced Greece's 2009 budget gap was would be twice previous estimates and four times the EU ceiling.

The main Greek public sector union, which brought nurses, teachers and other public service workers onto the streets of Athens against the government's austerity measures, said it would hold another 24-hour strike in early May.

A poll showed on Friday support for Papandreou, while still high, was falling and a majority feared the bailout would hit living standards.

In Athens, many people said they thought the deal had been inevitable, but public sector worker Sofia Hatzaki was angry.

I hit the roof when I heard, she said. I want to scream. This means more austerity measures are coming and recovery is very far away.

(Writing by Mike Winfrey, editing by Paul Taylor)

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