Striking public workers challenged the Greek government's bailout-for-austerity deal with the EU and IMF on Tuesday as investors fretted about Athens' ability to push through ambitious budget cuts.

The main public sector union, ADEDY, began a 48-hour national strike that shut down ministries, tax offices, schools, hospitals and public services, with thousands of protesters converging on parliament in the center of the Greek capital.

Greek police guarding parliament fired teargas at a small group of protesters who threw rocks and bottles at them.

We want an end to the freefall of our living standards, said Spyros Papaspyros, the head of ADEDY, which represents about half a million workers in the Aegean nation of 11 million.

The euro slid for a second day to hit a one-year low against the dollar below $1.31 and Greek bonds fell, pushing yield spreads with benchmark German Bunds above 600 basis points.

Jitters about whether the 110 billion euro ($146.5 billion) aid package would be enough to stem the euro zone's sovereign debt crisis also pushed up Spanish and Portuguese spreads and hammered Spanish stocks.

This would suggest that contagion fears have not been fully doused, with the Greece rescue terms not allaying fears of states facing similar challenges, Nomura rate strategist Sean Maloney said.

Markets were spooked by an announcement from investment bank Lazard that it had been hired by the Greek government to give it financial advice. Lazard recently advised countries like Argentina, Ecuador and Ivory Coast on sovereign debt restructurings, a move Greece has repeatedly said it is not considering.

Any form of debt restructuring is out of the question, Greek Finance Minister George Papaconstantinou told Reuters after news of the Lazard hire. No one has been hired to advise us in this regard.

Worries that the aid package may be insufficient to meet Greece's borrowing needs have contributed to market concerns.

Economists at several European financial firms calculated those needs to the end of 2012 at 120 billion euros, based on latest IMF and Greek government figures. Germany's Bild daily cited a government estimate of 150 billion euros given to the parliamentary finance committee.

European Commission officials said they expected Athens to be able to return to markets for funding in the second half of 2011 once it had won back credibility by implementing tough reforms.

But that remains a big if, given the grim economic outlook and the scale of public opposition.

SOCIAL COHESION

These government measures are destroying my life, said Panagiota Katsagani, a 25-year-old part-time school teacher who was marching in Athens on Tuesday. I was planning my future, now I have to go back and live with my parents.

Participation in demonstrations has so far been limited to a few tens of thousands, smaller than riots that paralyzed Athens in December 2008 following the police killing of a teenager.

But anger is growing, raising questions about whether Prime Minister George Papandreou's socialist government can successfully implement what it has promised.

Whether Greece can actually adjust, whether their social cohesion will remain -- that's the key thing to watch, said sovereign ratings analyst Tom Byrne of Moody's.

European policymakers kept up a barrage of soothing comment designed to calm markets and reassure voters that the bailout will work.

The tough decisions made over the past weekend have eased (the problems). We are going in a better direction, European Central Bank Governing Council member Erkki Liikanen told Finnish public broadcaster YLE.

Deutsche Bank CEO Josef Ackermann, who has been spearheading a drive in Germany to get the private sector to participate in the bailout, said fellow German firms Allianz and Munich Re had responded positively.

German Finance Minister Wolfgang Schaeuble said that Greece may not have to tap the full amount of aid pledged to it because of contributions from the financial sector.

Some newspaper editorials said the bailout was more a rescue for European banks holding Greek debt than one of ordinary Greeks.

With this aid package, we're really only aiding ourselves -- we're bailing out our own banks and investors, German business daily Financial Times Deutschland said.

It said the message to Greece was: Would you kindly pinch the money from your pensioners, functionaries, and hopefully a bit from your bloated military please? Thank you for doing it for us, whatever your reasoning may be.

(additional reporting by Yoo Choonsik in Tashkent, Gernot Heller and Madeline Chambers in Berlin, Jan Strupczewski in Brussels and Tim Hepher in Paris; writing by Paul Taylor and Noah Barkin)

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