ATHENS Greek Prime Minister George Papandreou has struck a deal to stand down and let Finance Minister Evangelos Venizelos form a coalition government aimed at winning parliamentary approval for Greece's latest bailout, sources close to the deal told Reuters on Friday.
Forming a coalition would avoid the risk of immediate snap elections that would push Greece closer to a default on its debts and would give Athens breathing space to approve the bailout to receive a vital sixth tranche of aid from lenders.
The sources said Venizelos had won the backing of leaders of some smaller parties to support the coalition before calling early elections in a few months.
They stressed that the deal was conditional on Papandreou confirming he would stand down when he speaks in parliament on Friday before a confidence vote on his socialist government.
"There is some concern that Papandreou may change his mind at the last minute and all eyes are on his speech in parliament," one source said, requesting anonymity.
The new government would probably exclude the main opposition conservative New Democracy party, the sources said.
Venizelos, a member of the ruling PASOK socialist party, would be prime minister of the new coalition government and it was not clear whether other parties would be given portfolios.
Papandreou provoked uproar at home and abroad on Monday when he announced a referendum on the 130 billion euro (112 billion pound) bailout, agreed by euro zone leaders only last week.
Under heavy domestic and international pressure, he backed down on a popular vote which could well have rejected the deal, cutting off Greece's last financial lifeline and potentially sinking euro zone leaders' attempts to stop the debt crisis spreading to bigger economies such as Italy and Spain.
The government officially announced earlier on Friday that the referendum would not go ahead.
The conservative New Democracy party had proposed a national unity government with the sole aim of forcing the bailout through parliament before early elections.
Venizelos, an ambitious and powerful Socialist who is leading talks with the EU, the IMF and banks on the country's bailout and debt swap deals, had broken ranks with Papandreou over the referendum and argued it was not what Greece needed.
Greece is due a vital 8 billion euros aid instalment this month, but exasperated European leaders have warned the country will not receive any more aid until it votes to meet its commitments to the euro zone.
Venizelos had been kept in the dark by Papandreou on the plan to announce a referendum, a Greek government official has said.
Papandreou is expected to scrape through the confidence vote, but analysts say it could go down to the wire.
PASOK has 152 deputies in the 300-member parliament. One lawmaker said on Thursday she would not back the government in the confidence vote, but on Friday softened her line.
The vote comes against a backdrop of growing anger in Greece over a bitter austerity bill of higher taxes and pay cuts while the country struggles through a fourth year of recession. Exasperated Greeks who blame a corrupt political elite for the crisis have held frequent protests and strikes.
(Reporting by Dina Kyriakidou; editing by David Stamp)
Our top photos from the last 24 hours.