Greek Prime Minister George Papandreou sacrificed his unpopular finance minister on Friday and put his main socialist party rival into the job in a bid to force through an austerity plan to avert bankruptcy.

The appointment, which analysts said was a second-best after Papandreou failed to persuade respected former European Central Bank vice-president Lucas Papademos to come aboard, came just before a crucial Franco-German summit to discuss future aid to Athens.

The elevation of Defense Minister Evangelos Venizelos to the finance ministry was aimed at securing party backing for crucial tax rises, spending cuts and sell-offs of public assets required for the EU and IMF to disburse emergency loans to keep Greece afloat next month and avoid a default which could unleash global financial turmoil.

Outgoing Finance Minister George Papaconstantinou, who negotiated a first 110 billion euro bailout for Athens last year and had the confidence of international lenders and financial markets, was shunted aside to the environment ministry in a crisis-driven reshuffle.

Venizelos is politically powerful and that might bode well for the implementation of fiscal consolidation, even though he has no track record in financial matters, UBS analyst Alexander Kyrtsis said.

Initial Greek market reaction was positive with bank shares rising by as much as 4 percent and the Athens stock market index up 2 percent.

But bond markets remain spooked by fears of a Greek default and most economists are overwhelmingly skeptical that Greece can ever repay its debt mountain, which has reached 340 billion euros or 150 percent of the country's annual economic output.

Reuters' calculations based on 5-year credit default swap prices from Markit show an 81 percent probability of Greece eventually defaulting on its debt based on a 40 percent recovery rate.

In Berlin, German Chancellor Angela Merkel and French President Nicolas Sarkozy will try to overcome sharp differences on how to involve private investors in the second rescue plan without sparking carnage in financial markets.

A German minister said he expected them to strike a compromise after weeks of wrangling that has rattled markets.

I believe the meeting today will yield a solution, German Deputy Foreign Minister Werner Hoyer told ZDF television. I am sure they will come to a compromise.

The European Central Bank and European Commission have warned that any form of private sector involvement that causes a credit event or a downgrading of Greek debt to default status could wreak devastating damage on the euro zone.

BOND MARKETS RATTLED

Battered by strikes, protests and a string of resignations in his PASOK party, Papandreou has vowed to drive through his unpopular reform program for the sake of stability in Greece.

The political drama in Athens, where mass street protests turned violent and efforts to form a national unity government collapsed on Wednesday, and the splits in the EU continued to rattle bond markets on Friday.

The yield on 10-year Greek government bonds spiked to a record high of 18.9 percent just before the reshuffle was announced, and the cost of insuring Greek debt against default also hit a new all-time peak.

There were some signs on Thursday of growing tension in interbank lending on money markets, as occurred when the Greek debt crisis erupted early last year.

In the latest warning from the ECB, policymaker Yves Mersch said a disorderly insolvency would have devastating effects for the whole currency bloc and a new financial crisis would be more than likely.

The European Union's top economic official, Olli Rehn, told a Finnish newspaper he was sure the EU and the International Monetary Fund would release a crucial 12 billion euro loan tranche in early July to keep Athens from defaulting.

Rehn acknowledged it would take longer to put together a second rescue package for the heavily indebted state, due to differences over how to involve private investors, but he called for decisions by mid-July rather than leaving the issue until September, as EU paymaster Germany is suggesting.

China weighed in, saying it had a vital interest in the euro zone overcoming its debt woes and had increased its holdings of euro debt, but gave no figures or timeframe.

Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us, Vice Foreign Minister Fu Ying told a media briefing in Beijing.

Rehn said he expected euro zone finance ministers to take decisions on a successor program for Greece on July 11.

But two sources briefed by the German government said Berlin wanted to postpone agreement on a new 120 billion euro program, including 30 billion in privatization proceeds, until September due to disputes over how to involve private investors.

Backed by the Netherlands and Finland, Germany wants a voluntary debt swap in which bondholders would be given new bonds with a seven-year maturity, but credit rating agencies have warned they would treat that as a selective default.

That could prompt the ECB to refuse to accept Greek bonds as collateral, depriving Greek banks of vital liquidity on which it is totally dependent.

The European Commission, the ECB and France favor a softer form of private sector involvement under which banks would agree to roll over Greek bonds as they mature and are redeemed.

Fitch Ratings appeared to open the door to a possible compromise on Wednesday by saying that while it would treat such a rollover as a restrictive default, it would keep Greek bonds rated at CCC.