Greece readied severe austerity measures on Thursday to secure multi-billion dollar aid, providing relief to financial markets but drawing threats of a mighty battle from Greek unions.

A union official said the IMF had asked Greece to raise VAT, scrap salary bonuses amounting to two extra months of pay in the public sector and accept a 3-year pay freeze. It's a done deal, said Ilias Iliopoulos, general secretary of public sector union ADEDY after meeting Prime Minister George Papandreou.

Sources familiar with the talks said officials were expected to announce the details of a three-year deal by Monday. That was enough to spark a relief rally in markets fearful of contagion across the eurozone.

The talks are tough, Greek government spokesman George Petalotis said of meetings with officials of the International Monetary Fund, the European Central Bank and the European Union.

No-one can guarantee anything. We know how difficult the country's situation is.

Trade Unions have made clear they will oppose austerity measures and have called a series of strikes - potentially complicating government efforts to drive through fresh cuts. A protest rally on Tuesday drew about 2,000 people.

It's a disaster! The government has crossed the line. We can't live this way, said Despina Spanou, member of public sector union ADEDY's board. We will fight these measures with all our might, because this is a battle for survival.

Opinion polls show a majority of Greeks object to the involvement of the EU and IMF and two thirds believe there will be social unrest.

German Chancellor Angela Merkel, whose country would play a lead role in any support deal, made clear Germany would demand strict compliance in any deal.

Germany will help as soon -- and I would emphasis 'as soon' -- as the conditions are met.

Greece is in discussions on a package of up to 135 billion euros ($180 billion).

In Brussels, Economic and Monetary Affairs Commissioner Olli Rehn, said the EU should complete talks with Greece within days. He gave no details of the package.

Markets were calmer.

The euro rebounded from a one-year low and Greece's borrowing costs eased. The premium investors demand to hold 10-year Greek government bonds rather than euro zone benchmark German Bunds narrowed to 750 basis points from 800 bps at Wednesday's settlement close.

The euro rose 0.3 percent to $1.3254, though pared gains after EU Economic and Monetary Affairs Commissioner Olli Rehn said the European Union should complete talks with Greece within days but could not provide details.

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In another sign of market relief, Greek bank stocks surged. The Athens bourse's banking index was up 5.6 percent to 1,802.88 points, outperforming the Athens general index which gained 3.2 percent.

Investors anticipate that Greece will get a much bigger aid package than previously expected, in time, said Takis Zamanis, a trader at Beta Securities.

Ratings agency Standard & Poor's cut Spain's credit rating on Wednesday, a day after downgrading Portugal and slashing Greece to junk status. The move hit the euro and European shares, underscoring the risks of contagion in the 11-year old currency zone.

A successful Italian bond sale seen as the first of the euro zone peripheral issuers to be tested after the S&P downgrades may have eased some fears of a rapid contagion.

This is a big vote of confidence from the market, Peter Chatwell, Rate Strategist at Credit Agricole, said. Both of the auctions have healthy bid cover ratios.

Germany's conservative Frankfurter Allgemeine newspaper saw broader implications for Europe in the Greek crisis than the danger of a spread to other vulnerable countries such as Portugal, Ireland and Italy.

Whoever thinks the Greece crisis is a currency or financial problem, is coming up far too short, and could therefore end up falling into an abyss..This is ultimately about the whole of the project Europe.

(Additional reporting by Dave Graham in Berlin, Jo Winterbottom in Milan, Jason Hovet in Prague)

(Writing by Noah Barkin/Ralph Boulton; Editing by Janet McBride)

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