Greece has sealed a deal with the European Union and IMF that opens the door to a multi-billion euro financial bailout and will require big sacrifices from the Greek people, Prime Minister George Papandreou said on Sunday.

The aid package, expected to total up to 120 billion euros ($160 billion) over three years, still needs backing from Greece's European peers as a May 19 deadline looms when Athens badly needs funds to make a big debt repayment to its creditors.

Telling angry Greeks to chose between a painful rescue or economic collapse, the government announced budget cuts of 30 billion euros ($40 billion) over three years, on top of measures already agreed. Athens now aims to bring its towering deficit back to the EU limit by 2014, two years later than originally promised.

The package is the first rescue of a member of the 16-nation euro zone and aims to stem a debt crisis that has shaken financial markets worldwide. But Greeks have already taken to the streets against the austerity drive.

It is an unprecedented support package for an unprecedented effort by the Greek people, a somber Papandreou told a televised cabinet meeting.

These sacrifices will give us breathing space and the time we need to make great changes, he added. I want to tell Greeks very honestly that we have a big trial ahead of us.

The aid package will help defuse the primary cause of concern for creditors which is the imminent risk of default, said Lena Komileva, head of G7 market economics at Tullett Prebon. But she noted that there was still a question mark over political approval across Europe.

Finance Minister George Papaconstantinou outlined the deal but said its size would be announced when he attends a meeting of his euro zone counterparts in Brussels later on Sunday.

The finance ministers are expected to recommend the deal, but euro zone leaders also need to give their blessing, likely at a summit on Friday or Saturday. Parliaments of some member nations must also give their approval.

European diplomats said they expected the emergency funding to be unblocked by the second half of the following week, beginning May 10. Athens needs funds by May 19, when it has to repay 8.5 billion euros of debt to its creditors.

COLLAPSE OR SALVATION

We are all being called to make a choice, said Papaconstantinou.

The choice is between collapse or salvation. The choice is between fleshing out a very ambitious and difficult 3-year program of fiscal consolidation, a program of structural reforms ... or the country reaching an absolute dead-end.

Fearing Athens may default, investors have dumped Greek bonds, meaning the government could borrow only at sky-high interest rates, putting an unsustainable burden on the budget.

Papaconstantinou said the deal would cover a large part of Greek borrowing needs for the next three years. In return Athens promised to slash its budget deficit to the EU limit of three percent of GDP by 2014 from 13.6 percent last year.

Today we have to flesh out an economic program which sees fiscal efforts to cut the deficit by 11 (percentage) points of GDP, or 30 billion euros, starting from today and over the next three years, Papaconstantinou said.

Salaries and pensions in the public sector would be frozen during the three-year program while a fund backed by the IMF and EU would be set up to help Greek banks. Value-added tax and duties on fuel and alcohol will rise sharply.

Papaconstantinou said Greece's public debt would soar to nearly 150 percent of GDP -- a higher peak than forecast earlier -- but start falling from 2014. Athens would return to commercial borrowing when appropriate, he added.

The German government, which is to contribute 8.4 billion euros in the first year, says it will try to push the necessary law through the lower house of its parliament by this Friday.

SOLID AND CREDIBLE

In a statement, European Commission President Jose Manuel Barroso recommended that Europe activate the aid, calling the package of austerity measures solid and credible.

This assistance will be decisive to help Greece bring its economy back on track and preserve the stability of the Euro area, Barroso said.

Greece and its international backers hope the deal can prevent the crisis from spreading to other euro zone members with fragile finances such as Portugal and Spain.

But Papandreou faces a Herculean task in convincing Greeks to accept draconian austerity measures at a time when the economy is already in a deep recession.

On Saturday, thousands marched in May Day protests in Athens shouting slogans against new budget cuts they say will hurt the poor and plunge the country into a downward economic spiral. An ALCO poll on Friday showed more than half of Greeks plan to take to the streets in protest at the new cuts.

Although Greece makes up only about 2.5 percent of the euro zone's economic output, its woes have shaken confidence in the currency bloc and deepened global fears about sovereign debt built up during the financial crisis.

In Germany, there is deep resentment about rescuing Greece, which manipulated its economic figures in order to enter the euro zone in 2001 and has lived beyond its means ever since.

Chancellor Angela Merkel insisted on making the International Monetary Fund (IMF) part of any rescue and made German aid contingent on bolder austerity steps from Athens, delaying the rescue and underscoring deep divisions in the bloc.

Economists say that if the rescue fails to calm markets, European countries could end up footing a bill of half a trillion euros ($650 billion) to save several other nations.

Both Portugal and Spain saw their debt downgraded by ratings agencies this week and could become targets for the market unless they tackle their own deficits swiftly.

The problem has grown bigger, this fire is threatening to spread and hurt Greece further and the other euro zone countries and economies, Papandreou told the Greek cabinet. The cost of putting it out is expected to be huge, and the burden that Greeks will shoulder is even bigger.

(Writing by Noah Barkin/David Stamp; editing by Maria Golovnina)

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