By Renee Maltezou and John O'Donnell
ATHENS/FRANKFURT (Reuters) - Greece's leftist-led government said it will submit a request to the euro zone on Thursday to extend a "loan agreement" for up to six months, raising prospects of a last-minute deal to keep the heavily indebted country afloat.
While European officials worked frantically with Athens to find a formula, EU paymaster Germany said no such deal was on offer and led the chorus of partners demanding that Athens must stick to the terms of its existing international bailout.
The move, confirmed by an Athens official, is an attempt by the new leftist-led government of Prime Minister Alexis Tsipras to keep a financial lifeline for an interim period while sidestepping tough austerity conditions in the EU/IMF programme.
Whether finance ministers of the 19-nation currency bloc, who rejected such ideas at a meeting on Monday, accept the request as a basis to resume negotiations will depend on how it is formulated, an EU source said. The wording has to match EU legal texts to win approval in several euro zone parliaments.
Greece is burning through its cash reserves and could run out of money by the end of March without fresh funds, a person familiar with the figures said. He said Athens had enough to repay a 1.5 billion euro instalment to the IMF next month but would struggle to pay public sector salaries and pensions in April.
Hardline German Finance Minister Wolfgang Schaeuble poured scorn on the Greek gambit, telling broadcaster ZDF on Tuesday evening: "It's not about extending a credit programme but about whether this bailout programme will be fulfilled, yes or no."
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However, German Economy Minister Sigmar Gabriel, leader of the Social Democratic junior partners in conservative Chancellor Angela Merkel's coalition, welcomed what he called the signal from the Greek government that it was ready to negotiate.
With the current bailout deal with the euro zone due to expire on Feb. 28, Tsipras said talks were at a crucial stage and his demands for an end to austerity were winning backing.
"There were protests across Europe supporting the moves made by Greece and we have managed for the first time through contacts with foreign leaders to create a positive stance on our requests," he said at a meeting with President Karolos Papoulias.
BRINKMANSHIP
EU officials said intensive consultations were under way between Athens, the Eurogroup and the European Commission, with Italy and France also involved in the search for a compromise.
Germany and other euro zone countries were standing firm on their insistence that there can be no roll-back of reforms already implemented under the bailout and that Greece will have to repay all it has borrowed, they said.
European stocks rose to multi-year highs on Wednesday amid rising optimism that a deal would be reached by the end of the week. Greek government bond yields fell sharply and Spanish, Portuguese and Italian yields also dropped as fears of contagion to other peripheral euro zone countries eased.
Credit ratings agency Fitch warned that Greece's brinkmanship could do the country lasting economic damage.
Government spokesman Gabriel Sakellaridis confirmed that Athens would send a formal application. "We will not back down on certain points that we consider red lines. The (bailout) memorandum died on Jan. 25," Sakellaridis told Antenna TV.
That was the day Greek voters elected a government led by Tsipras's hard left Syriza party, which had promised to scrap the 240 billion euro bailout, reverse austerity measures and end cooperation with the hated "troika" of inspectors from the Commission, the European Central Bank and the IMF.
Sakellaridis said the loan extension request would be made on Wednesday, but a government official later said it would not be sent until Thursday.
ECB REVIEWS LENDING
The ECB's Governing Council met in Frankfurt to decide whether to continue and possibly increase emergency lending assistance to Greece's banks, plagued by deposit withdrawals.
The ECB is not expected to pull the plug this week but Germany's Bundesbank is leading opposition to any increase in the funding by the Greek central bank, people familiar with the situation told Reuters.
Without added liquidity, the banks face a tightening squeeze as savers withdraw money that could force Greece to introduce capital controls if there is no deal.
In a sign of concern in Washington at the financial risks to a strategically located NATO ally, U.S. Treasury Secretary Jack Lew telephoned Finance Minister Yanis Varoufakis to urge Greece to strike a deal with the euro zone and IMF, warning that failure would lead to immediate hardship.
With several euro zone countries needing parliamentary ratification of any change or extension, time is running short.
Eurogroup chairman Jeroen Dijsselbloem has said Greece must request an extension of the existing bailout by the weekend or the programme will expire at the end of this month.
Greece could then run out of money within weeks since it has to make hefty repayments to the IMF in March.
The Athens government released documents on Wednesday indicating it was taking a more flexible line to placate euro zone creditors than its anti-bailout rhetoric at home has suggested. They showed Varoufakis had offered to accept conditions on an extension to its loan agreements and even an inspection by the European Commission at a fraught meeting in Brussels on Monday.
As the deadline approaches, several European leaders called Tsipras to seek a solution, including Italian Prime Minister Matteo Renzi, French President Francois Hollande and Cypriot President Nicos Anastasiades, but sources said the main go-between was European Commission President Jean-Claude Juncker.
(Additional reporting by George Georgiopoulos and Deepa Babington in Athens, Jan Strupczewski in Brussels, Caroline Copley in Berlin and Paul Carrel in Frankfurt; Writing by Paul Taylor and David Stamp; Editing by Sonya Hepinstall and Paul Taylor)