Greek Prime Minister George Papandreou said on Wednesday he would push ahead with a referendum on an EU bailout deal, defying demands from lawmakers of his own party that he quit for jeopardizing Greek membership of the euro.

The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro, Papandreou told a late-night cabinet meeting, according to a statement released by his office.

No one will be able to doubt Greece's course within the euro, he said, adding that market turmoil triggered by his announcement of the referendum late on Monday would be short-lived.

The euro and global stocks were pummeled on financial markets on Tuesday after Papandreou's move threw into question the survival of crucial efforts to contain the euro zone's sovereign debt crisis.

The leaders of France and Germany, caught unawares by Papandreou's high-stakes gamble, summoned him to crisis talks in Cannes on Wednesday to push, before a summit of the G20 major world economies, for quick implementation of the bailout deal.

But Papandreou said Greece's partners would support its policies and urged the G20 meeting to agree policies that make sure democracy is above market appetites.

German Finance Minister Wolfgang Schaeuble told Wednesday's Financial Times Deutschland newspaper he was confident the Greeks would support the government's reforms in the referendum.

If Greece accepts the burden and efforts required by the aid programs, if it wants to stay within the euro zone, then we will support it, Schaeuble said.

Papandreou most immediate hurdle is a confidence vote on Friday. He told the cabinet he believed he would both win the vote and hold the referendum as planned.

WE WILL NOT BACK DOWN

We believe the government will once again win a vote of confidence in order to proceed with its plans, government spokesman Angelos Tolkas told reporters. We will not back down on anything we have to do to save the country.

Six senior members of Greece's ruling PASOK socialists, angered by Papandreou's decision to call a plebiscite on the 130 billion euro rescue package agreed only last week, said he should make way for a politically legitimate administration.

During a cabinet meeting that lasted over 5 hours, some ministers backed Papandreou's decision, others questioned the timing of the referendum and criticized the fact they had been kept in the dark, and a handful were openly against it, government sources said.

I think this was the wrong decision and we must take it back, one minister was quoted as saying. We must not risk our position in the euro.

A leading PASOK lawmaker quit the party, narrowing Papandreou's slim majority to 152 of 300 seats, and several others called for a government of national unity followed by a snap election, which the opposition also demanded.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held.

Euro zone leaders last week thrashed out Greece's second financial rescue since last year, in return for yet more austerity, in the hope that it would ease uncertainty surrounding the future of the 17-nation single currency.

Instead, financial markets suffered another bout of turmoil on Tuesday due to the new political uncertainty and the risk that austerity-weary Greeks could reject the bailout. Opinion polls suggest most voters think it is a bad deal.

The euro fell almost half a U.S. cent to a session low of $1.3647 on Wednesday after Papandreou's latest remarks, showing that he had failed to ease market worries about the region's debt crisis.

ITALY DRAWN IN

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, raising Rome's borrowing costs to levels that proved unsustainable for Ireland and Portugal.

European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent.

Greece is due to receive an 8 billion-euro IMF/EU aid tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a no vote.

Dutch Finance Minister Jan Kees de Jager said the IMF might have difficulty paying out that tranche because of the looming referendum. I can imagine it will be difficult for the IMF to decide about the tranche but there will be uncertainty ... it is problematic, he told the Dutch parliament.

European politicians expressed incredulity and dismay at Papandreou's announcement on Monday evening, which took even his own finance minister by surprise.

Ireland's European affairs minister, Lucinda Creighton, whose own country is struggling through an EU/IMF bailout program, said last week's European summit was meant to have dealt with the uncertainty in the euro zone.

And this grenade is thrown in just a few short days later, Creighton said. Legitimately there is going to be a lot of annoyance about it.

In a statement after French President Nicolas Sarkozy and German Chancellor Angela Merkel conferred by telephone, Sarkozy's office said France and Germany wanted to ensure the bailout package was implemented fast and in full. [nL5E7M11SG]

The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into throwing the euro zone a financial lifeline.

It could also further undermine dwindling political support in northern Europe for aiding Greece.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package.

DEFECTIONS

Papandreou said he needed wider backing for the budget cuts and structural reforms demanded by international lenders.

But the conservative opposition said an election was a national necessity.

Lawmaker Milena Apostolaki quit the PASOK parliamentary group, reducing Papandreou's strength just before the vote of confidence. Another MP, Hara Kefalidou, said she also opposed the referendum but did not leave the group.

More importantly, senior PASOK lawmaker Vasso Papandreou, not related to the prime minister, asked the Greek president to work for a national unity government to ensure Athens receives the rescue funds, followed by an early election.

Papandreou did not even inform Finance Minister Evangelos Venizelos he was going to announce the referendum on the latest EU aid deal, a government official told Reuters.

On the markets, players scurried for safer investments, hammering stocks and punishing the euro.

The FTSEurofirst 300 index of top European shares was down almost 4 percent, due not only to the possibility of a hard Greek default but also to Europe's inability to stop the debt crisis spreading to bigger economies such as Italy.

Banks exposed to Greece and Europe's bigger, troubled economies, suffered most. Shares in France's Societe Generale tumbled 17 percent and Credit Agricole was down almost 12.5 percent.

In New York, Morgan Stanley, which investors worry has heavy exposure to Europe, fell 8 percent as the Dow Jones industrial average dropped almost 2.5 percent.

(Additional reporting by Ingrid Melander and Renee Maltezou in Athens, Michele Sinner in Luxembourg, Carmel Crimmins in Dublin, Martin Santa in Bratislava, Ana Nicolaci da Costa, Marius Zaharia, Jeremy Gaunt, Adrian Croft and Marius Zaharia in London, and Erik Kirschbaum and Madeline Chambers in Berlin; Writing by Dina Kyriakidou and David Stamp; Editing by Paul Taylor and Kevin Liffey)