UPDATE 3-Greek coalition allies block austerity plan over labour cuts
* Lenders back down on scrapping automatic wage hikes
* Two parties have long opposed wage, other cuts
* Troika to tell Euro Working Group no deal agreed-official
* Draft deal shows two-year extension on cuts assumed (Adds details from draft deal)
By Lefteris Papadimas
ATHENS, Oct 23 (Reuters) - A concession from Greece's lenders on Tuesday failed to win over two junior parties in the ruling coalition who blocked agreement on a vital austerity package because they oppose labour reforms.
Hopes that a final deal on the austerity cuts was near had grown after inspectors from the lenders left Athens last week saying the two sides had agreed on most reforms and austerity cuts needed to unlock the country's next tranche of aid.
A draft document with agreed measures and targets between the two sides obtained by Reuters on Tuesday said the austerity cuts would be spread over four years as sought by Athens rather than the two years originally envisaged under Greece's bailout.
"This will limit the negative growth impacts in 2013-14, when the economy needs to find a firmer footing, while still preserving a good adjustment pace," the draft document said.
Still, Greece's government first has to overcome internal divisions before it can strike a comprehensive deal on the cuts.
The Democratic Left and PASOK Socialist parties in Prime Minister Antonis Samaras's conservative-led coalition have long opposed unpopular proposals from European Union (EU) and International Monetary Fund (IMF) lenders to cut wages, reduce severance payments and scrap automatic wage hikes.
Labour Minister Yannis Vroutsis said the lenders had backed down on the plan to axe automatic wage hikes, but that failed to convince the two parties to sign up to the 11.5 billion euro ($14.90 billion) austerity package. Athens needs a comprehensive deal on the spending cuts to secure aid to keep afloat.
"I won't accept or vote for the labour reforms the troika demands, and neither will the deputies of the Democratic Left," Fotis Kouvelis, the party's leader, told reporters after a meeting of the three leaders in Samaras's coalition.
"This will be my stance, steady and unchanged, until the end ... Labour rights have already been crippled and these troika demands are nothing more than a plan to eliminate what's left."
Evangelos Venizelos, head of the PASOK Socialists, also reiterated his opposition to the reforms and urged Samaras to convince European counterparts to back down on the proposals.
"We must not open new fronts like labour reforms that do not contribute anything to our fiscal targets," Venizelos said, adding that labour cuts were implemented earlier this year.
"It's unjustified and provocative to open this discussion again now."
Officials from the so-called troika of the European Commission, European Central Bank and IMF have told the finance minister that they now plan to tell a Euro Working Group meeting on Thursday that no deal has been struck with Greece, a finance ministry official said.
SAVING GREECE IF WE DARE
The allies in the past have signalled that they will ultimately sign up to the austerity package after getting concessions from lenders on the contested labour reforms.
But with Greece running out of time to clinch a deal, their continued refusal to approve the package threatened a political impasse that could jeopardise Athens's efforts to get aid before cash runs out next month.
In a televised statement, Samaras made an appeal to his allies and the country to back the contested austerity package before it is too late.
"I don't even want think what would happen if at this moment I don't hold on to the steering wheel. I'm looking only ahead, asking for the biggest possible unity," Samaras said.
"We will save Greece, those of us who dare to."
Samaras's government has been holding parallel talks for months with coalition party leaders and the troika of European Commission, European Central Bank and International Monetary Fund lenders on the deeply reviled spending cuts.
The draft document also confirmed that those measures would be worth 13.5 billion euros, with 9.2 billion euros implemented next year alone. It also outlined plans to initially place at least 2,000 public sector workers into a controversial layoff scheme followed by a further 6,250 placed in it every three months in 2013.
Both Kouvelis and Venizelos are under pressure from their voter base to fight the proposed round of wage and pension cuts that many Greeks say has only impoverished them and plunged the economy into a tailspin. Greece is heading into its sixth year of recession with one in four Greeks out of a job.
Kouvelis, in particular, has struggled with a large chunk of his own lawmakers threatening to vote against the austerity cuts and seen his party's popularity decline among voters.
"This is the most crucial point in these negotiations," a Democratic Left party official told Reuters, referring to the contested labour reforms.
"We don't want to topple the government but we cannot accept these labour reforms. We just hope that they withdraw them." ($1 = 0.7714 euros) (Additional reporting by Renee Maltezou, Karolina Tagaris and George Georgiopoulos; Writing by Deepa Babington; Editing by Michael Roddy)
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