Portugal's two key opposition parties signaled after meeting European and IMF officials on Wednesday they will back a 78-billion-euro bailout that is expected to consign the economy to two years of recession.

The country needs this pact, as we have been saying for a long time...It is a necessary but difficult agreement, Pedro Passos Coelho, leader of the main opposition Social Democrats (PSD) told RTP television.

Passos Coelho said the terms of the deal offer better chances of success than in Greece and Ireland -- the two other euro zone countries under bailout programs.

Paulo Portas, the leader of a smaller right-wing CDS-PP party, went further and said his party will formally commit itself to the terms of the deal with the lenders.

With elections due in a month, the backing of the opposition, and especially the PSD, which is ahead in the polls, is crucial to guarantee that the EU signs off on the deal.

European officials want to ensure cross-party agreement by Portugal on the bailout in order to avoid the possibility of having to revisit terms of the deal after the June 5 election.

Caretaker Prime Minister Jose Socrates announced late on Tuesday that Lisbon had reached a three-year bailout agreement with the European Union and International Monetary Fund after weeks of talks. Socrates resigned in March after parliament rejected his minority government's latest austerity plan.

The European Commission said the EU/IMF mission will hold a news conference Thursday at 1000 GMT to announce details of the bailout deal.

European officials are also worried that Finland, where an anti-euro party could form part of the next government, may hinder a deal.

SHARP RECESSION LOOMS

Analysts say Socrates was eager to present the bailout deal first in an attempt to highlight the fact that it did not set measures as tough as those adopted by Greece and Ireland, hoping to gain an electoral advantage.

But according to the bailout memorandum, the terms to be included, such as higher taxes and steep spending cuts, point to a contraction of 2 percent in gross domestic product this year and the same in 2012.

That will make it even more of a challenge for the heavily indebted country, which has had some of the lowest growth rates in Europe for a decade, to return to financial health.

Jonathan Loynes, chief European economist at Capital Economics, also forecast a two percent contraction this year.

While the confirmation of the bailout should provide some reassurance that Portugal will be able to meet its upcoming bond redemptions, it won't put an end to speculation that -- along with Greece and perhaps others -- it will sooner or later need to undertake some form of debt restructuring, he said.

The announcement did provide some relief in the bond market, where Portuguese 10-year yields fell for the first time in many weeks, to around 9.95 percent, from a euro lifetime record of 10.32 percent Tuesday. The spread to German Bunds shrank to 666 basis points from Tuesday's high of 707.

Portugal was forced to seek a bailout after its government collapsed last month, sending its borrowing costs soaring.

In a reminder of the sharply rising rates Portugal faces in the markets, the country issued 1.12 billion euros in three-month treasury bills at 4.652 percent, far above a rate of 4.046 percent last month.

DEFICIT GOALS EASED

Lisbon won some leeway for its austerity drive from its lenders. This year's budget deficit target was raised to 5.9 percent of gross domestic product from 4.6 percent previously.

That still represents a sharp cut given the deficit totaled 9.1 percent of GDP last year and, under the deal, it must be lowered to 4.5 percent of GDP in 2012 and 3 percent in 2013.

The bailout deal includes up to 12 billion euros for the banking sector to recapitalize and orders banks to raise their core Tier 1 capital ratios gradually to 10 percent by the end of 2012, the official source said.

It also envisages 5.3 billion euros in privatization revenues up to 2013.

The interest rate on Portugal's bailout loan is expected to be set at a meeting of euro zone finance ministers in mid-May.

Even though we have clarity regarding the amount, the more interesting detail will be the interest rate that Portugal will have to pay on the loans so we are still waiting for this, said WestLB rate strategist Michael Leister.

Portuguese agreement to the loan terms is needed by June 15, when Lisbon has to redeem 4.9 billion euros of bonds.

Officials from the European Commission, the International Monetary Fund and the European Central Bank have been in Lisbon for almost a month to hammer out the agreement.

(Additional reporting by Andrei Khalip and Shrikesh Laxmidas; writing by Axel Bugge and Andrei Khalip)

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