Greece's deputy prime minister warned on Sunday that rebel lawmakers may block some reforms sought by international lenders but parliament would probably back an overall austerity package this week to avert a sovereign default.

Despite stern warnings from senior European Union politicians, Greece's conservative opposition continued to defy calls for national unity to pass the vital legislation, keeping up the pressure on Socialist Prime Minister George Papandreou.

Parliament is due to start debating on Monday the programme of tax increases and spending cuts worth 28 billion euros ($40 billion) over five years.

Papandreou needs parliament's approval this week to secure the payment of the next 12 billion euro installment of an EU/IMF bailout, vital if Greece is to avoid becoming the first euro zone nation to default on its debt next month.

European officials want private creditors to participate with a voluntary rollover of Greek debt avoid a default which would send shockwaves through the global financial system. Much of the debt is held by French and German banks.

A French banking source, confirming a report in Le Figaro newspaper, said on Sunday that France's government and banks had agreed on a rollover proposal. Creditors would reinvest 70 percent of the proceeds from Greek debt, receiving new bonds with longer maturities and shares in a zero coupon fund.

Deputy Prime Minister Theodore Pangalos told Spain's El Mundo newspaper he was optimistic about overcoming discontent in his party to win the first round of voting on Wednesday, on tax and spending targets and creating a privatization agency.

The package of short- and medium-term measures with which we basically hope to establish the framework to undertake reforms will be approved without difficulty, Pangalos told the newspaper in an interview.

He was more cautious about whether the government could push through legislation a day later on specific budget measures and privatization of specific state assets.

That's where we may have problems. I don't know whether some of our legislators will vote against it. It's possible.

With Greece unable to return to international bond markets next year, as foreseen under current 110 billion euro EU/IMF programme, European leaders are working on a second bailout of a similar size, including a contribution from private sector banks which would agree to a voluntary rollover of their Greek debt.

ANGER ON STREETS

Many Greeks who have lost jobs or seen their real income decline by nearly one-fifth over the last two years have reacted angrily at the prospect of new measures they say fail to target wealthy tax evaders and corrupt politicians responsible for Greece's debt spiral.

With government lawmakers reluctant to support more austerity in the face of public outcry, Papandreou's PASOK party has seen its slender majority whittled down by five defections over the last 13 months, leaving it with 155 seats in the 300-member parliament.

In a rare piece of good news for Papandreou, one of two PASOK legislators who announced they would vote against the package appeared to be wavering on Sunday after holding talks with Finance Minister Evangelos Venizelos at the weekend.

One moment I veer toward a 'no', the other toward a 'yes'. I will make a last-minute-decision, Thomas Robopoulos told Reuters. A third Socialist MP has said he will support the deal only if Venizelos gives him assurances on certain measures.

Ramping up pressure on the government, unions have called a two-day national strike from Tuesday. Many companies, including the main electricity group PPC which is slated for partial privatization next year, have started rolling stoppages.

Pangalos, who after a cabinet reshuffle this month shares his deputy premier's title with Venizelos, said he believed the conservative opposition would vote in favor of some measures.

But New Democracy leader Antonis Samaras turned a deaf ear to the appeals from home and abroad to support the package, saying the painful measures would only deepen Greece's worst recession in 37 year.

You can't ask for more taxes in an already overtaxed country, in a market that has been sucked dry, with economic activity at zero and a huge recession, he said in a statement.

In recent days, European leaders have added their voices to calls from Greek ministers to approve the measures and avoid a default.

The stability of the entire euro zone would be in danger and we would need to quickly ensure that the risk of contagion for the financial system and other euro area countries would be contained, German Finance Minister Wolfgang Schaeuble told German Sunday newspaper Bild am Sonntag.

Venizelos, who took over the finance portfolio in last week's reshuffle, clinched the agreement of EU and IMF inspectors on Thursday to additional measures which he hopes can put government finances back on an even keel after it failed to meet targets under its international programme.

The steps include a one-off solidarity levy on income, a rise in heating fuel tax and lowering the tax free income allowance to 8,000 euros a year from 12,000.

A peaceful crowd of around 1,000 people gathered on Sunday in Syntagma square outside parliament, which was protected by a line of riot police.

With youth unemployment running at around 40 percent, many of those who have taken to the streets in protest or camped in Syntagma over the last month are young people who fear the measures will worsen their dim economic prospects.

The choice is not between voting for the measures or defaulting, but between economic and social bankruptcy on the one hand and growth and social cohesion on the other, said the Left Coalition, a small opposition party, in a statement.

(Additional reporting by Tracy Rucinski in Madrid and James Regan in Paris; Editing by Peter Graff)

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