Greece raised the stakes on Thursday in its quest for EU help to tackle its debt crisis, warning it cannot achieve promised deficit cuts if its borrowing costs remain so high and may have to call in the IMF.

The country, however, strongly denied a report that it was scheduled to turn to the international lender as soon as April and said all options for getting support were still open.

This (report) is ridiculous, Finance Minister George Papaconstantinou told Reuters.

We have said from the beginning that all options are open ... we are not any closer now to the IMF (than before). These reports are just plain silly.

Market concerns that it may prove impossible to construct a euro zone financial safety net for the currency area's most heavily indebted member due to German reluctance sent the euro lower and hit Greek bank shares and bonds.

Prime Minister George Papandreou told the European Parliament that draconian austerity measures announced by his socialist government showed it was committed to the stability of the euro and would carry out necessary structural reforms.

But if we keep borrowing at very high rates, and this is the challenge we have, we cannot sustain the deficit reduction that these hard measures aim to achieve, he told a committee of the EU legislature.

The premium investors charge for holding Greek debt rather than benchmark German bonds rose as high as 319 basis points, meaning Athens would have to pay about 6.30 percent to borrow on capital markets, by far the highest yield in the euro zone.

Economists say such rates would compound Greece's problems in a year when it needs to borrow some 53 billion euros ($72.4 billion), 20 billion of it in refinancing between April 20 and end May.

Papandreou said Greece wanted a decision at an EU summit next week on a mechanism to provide financial support if needed, but stressed that Athens had not asked for money and would not default or leave the euro zone.

He said he hoped such visible EU backing would force market rates down and make it unnecessary for Greece to go to the IMF.

We have taken today measures that the IMF would have asked us to take. In fact, we are under an IMF program. However, we don't have the facilities that the IMF could give, he said.

Greece did not want to be in a situation when we have the worst of the IMF and none of the advantages of the euro zone.

IMF TALK TACTICAL?

The Dow Jones Newswires report quoting a senior Greek official as saying Athens may apply for IMF financial aid early next month drove the euro down against the dollar.

The government reported that unemployment staged its biggest jump in at least 11 years, highlighting the struggle Athens faces to plug big holes in its budget as spending cuts and tax rises threaten to further undermine a shrinking economy.

The jobless rate rose to 10.3 percent in the final quarter of 2009 from 7.9 percent a year earlier.

Analysts said that raising the specter of the first IMF intervention in the euro zone was mostly a tactic to increase pressure for agreement on European rescue mechanism.

The IMF talk on the part of the Greek government is intended to push euro zone partners into making explicit the standby arrangement which seems to have been agreed upon at the European Council level, in the hope that such an announcement will push Greek government bond spreads to tolerable levels for Greece to proceed with borrowing, said Michael Massourakis, head of economic research at Alpha Bank in Athens.

German Chancellor Angela Merkel, facing massive public opposition to bailing out Greece ahead of a crucial regional election in May, has taken the hardest line against any rescue arrangement.

A quick act of solidarity is definitely not the right answer, she told parliament in Berlin on Wednesday, calling for radical changes to the EU treaty to make it possible to expel a serial deficit offender from the euro zone.

After initially ruling out any recourse to the International Monetary Fund inside the single currency bloc, German government sources have begun this week to say Berlin might not oppose a Greek recourse to the Washington-based global lender.

EU diplomats said this reflected both domestic political and legal pressures in Germany against a euro zone rescue for Greece and perhaps an attempt to counter Greek tactics by suggesting the IMF card was not such a nuclear option.

Some in the EU, notably in France, would see it as a major failure of political and monetary unity if a member were to go elsewhere for a bailout.

Greek bank shares fell more than 4.0 percent on Thursday, underperforming the broader Greek market on concerns that EU support may not be forthcoming.

Right now, it does not seem to be a mood of consensus within the European Union for a special type of help to Greece, Beta Securities trader Takis Zamanis said.

Investors are worried that if things go on like this, the borrowing costs will stay at high levels sand make it difficult for the government to achieve its fiscal targets.

(additional reporting by George Georgiopoulos, Angeliki Koutantou and Lefteris Papadimas in Athens, Timothy Heritage in Brussels and William James in London; writing by Paul Taylor; editing by John Stonestreet and Patrick Graham)

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