Greece's government will approve a new austerity package on Wednesday after it survived a confidence vote that was a crucial hurdle in a battle to avert the euro zone's first sovereign debt default.

Prime Minister George Papandreou's reshuffled cabinet aims to get parliamentary approval for a package of spending cuts, tax hikes and state asset sales by June 28 and implement it by July 3 to secure 12 billion euros ($17 billion) in aid that is vital to avoid bankruptcy.

The vote follows a European ultimatum linking the release of the next installment of a 110 billion euro EU/IMF aid package to the tougher new five-year belt-tightening plan.

Without the loans, Athens would plunge into default next month, sending shock waves through the global financial system.

The euro rose in hopes that the immediate threat of market chaos could be avoided. But the gains were short-lived as traders remained worried about the will to implement harsh austerity measures against fierce public resistance and by doubts about Greece's ability to reduce its debt burden without some form of restructuring.

The yield on Greek government bonds tightened slightly against benchmark German Bunds, with the 2-year bond yield dropping 28 basis points, while Greek banking stocks opening flat after strong gains on Tuesday.

After some brief scuffles between police and protesters after the late night vote, the streets of Athens were calm on Wednesday with traffic running normally through Syntagma square where 20,000 demonstrators besieged parliament on Tuesday night.

The government won the late night confidence motion by 155 to 143 with two abstentions after all of Papandreou's Socialist Party deputies voted solidly with the government.

But with unions bristling for a fight and much of the public outraged by new austerity measures, implementing any reforms will be a challenge as Greece struggles in its worst recession in 37 years.

Within the parliament there is no problem at all, the real problem is in society, said Costas Panagopoulos of pollster ALCO. There's a lot of disappointment in the Greek society, there's a lot of anger and there's no hope at all. The new minister of finance and the government...have to offer some hope otherwise I cannot see how the government could remain stable.

DEFAULT ONLY WAY OUT FOR GREECE?

Euro zone creditor governments were starting talks with commercial banks and insurers on Wednesday about a voluntary private sector contribution to a second rescue program for Greece, a source in the German government said.

The finance ministry has invited banks and insurers for talks on a working group level in Frankfurt, the source told Reuters, adding that the same would begin elsewhere in the 17-nation single currency area.

Private bondholders will be asked to commit to rolling over their Greek bonds when they mature, but Berlin was forced to drop a more ambitious plan for a bond swap extending maturities by seven years after the European Central Bank objected.

Speaking hours after the vote, Mohamed El-Erian, head of Pimco, the world's biggest bond fund, said he expected Greece to end up defaulting on its debt.

For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default, El-Erian told a conference in Taipei.

Papandreou managed to stifle dissent within his party last week, replacing unpopular government figures with critics of the austerity plan and repeatedly hammering home the message of what was at stake.

If we are afraid, if we throw away this opportunity, then history will judge us very harshly, Papandreou said in a final appeal for support before the confidence vote.

Having already missed targets agreed in its first, year-old bailout, Athens needs the reforms to keep receiving those funds and secure a second bailout worth an estimated 120 billion euros.

The new mid-term plan envisions raising 50 billion euros by selling off state firms and includes 6.5 billion in 2011 fiscal consolidation, almost doubling existing measures that have helped extend a deep recession into its third year.

Most analysts remain skeptical that Greece will be able to repay its vast public debt pile of 340 billion euros, 1.5 times its annual economic output and more than 30,000 euros for each of its 11.3 million people, even if the reforms are implemented.

But for now both markets and European policymakers are willing to give Greece the benefit of the doubt.

Although this clearly is not going to be a long-term fix, investors see this as a chance that the can will be kicked further down the road, said David Dietze, Chief Investment strategist at Point View Financial Services.

ANGER BUILDS IN ATHENS

European Commission President Manuel Barroso, who had piled on pressure before the vote, expressed relief.

Tonight's vote in the Greek Parliament removes an element of uncertainty from an already very difficult situation, he said, adding that Papandreou could now concentrate on implementing the reforms.

Acting IMF chief John Lipsky said international lenders were willing to help peripheral euro zone economies as long as they tried to carry out reforms. He said the Greek fiscal system was broken but could be fixed with the right political will.

The cabinet will meet on Wednesday afternoon to approve a draft bill implementing the austerity plan, officials said. It will aim to get it passed in parliament by June 28 and then it must push through laws implementing the reforms -- potentially more difficult as it will tackle individual privatizations, tax measures and spending cuts -- in time for an extraordinary meeting of euro zone finance ministers on July 3.

New Finance Minister Evangelos Venizelos, in an attempt to answer a key grievance of protesters, told parliament the government's top priority would be to build a fairer tax system.

He is expected to drop plans for an increase in fuel tax and for a special levy on real estate, instead targeting the self-employed -- who are widely believed to be amongst the worst tax evaders -- while lowering the burden on low-paid employees.

Inspectors from the International Monetary Fund and European Union arrived on Tuesday to examine a request by Venizelos for changes to the mid-term plan. The government said the mission would discuss changes at a technical level.

Euro zone officials have told Reuters the plan for the new bailout, meant to extend Greece's year-old 110-billion-euro deal and fund it into late 2014, would feature up to 60 billion euros of fresh official loans, 30 billion euros from the private sector and 30 billion euros from privatizations.

Leading global credit ratings agencies have warned, however, that changes to terms of existing government bonds could be considered as a default.

(Additional reporting by Renee Maltezou, Lefteris Papadimas in Athens, John O'Donnell in Brussels and Faith Hung in Taipei; Writing by Barry Moody and Daniel Flynn; editing by Paul Taylor)