The Greek government will seek a parliamentary vote on Friday to endorse immediate reform commitments it is offering euro zone creditors in a race to win a new loan and avert bankruptcy and a possible exit from the euro zone.
A Greek official said lawmakers would be asked to authorize the leftist government to negotiate a list of so-called "prior actions" it must take before aid funds are disbursed, a key step to convince skeptical lenders of its serious intent.
The announcement came as Prime Minister Alexis Tsipras prepared to send a detailed reform plan to the head of Eurogroup finance ministers before a midnight deadline in hopes of winning a deal to prevent a looming bank collapse and stay in the euro.
Greek banks have been closed since June 29, when capital controls were imposed and cash withdrawals rationed after the collapse of previous bailout talks.
Germany, the biggest creditor, meanwhile took a small step towards Athens by conceding that Greece will need some debt restructuring as part of a proposed new three-year loan program to make its economy viable.
The admission by German Finance Minister Wolfgang Schaeuble came hours before a midnight deadline for Athens to submit a reform plan meant to convince European partners to give it another loan to save it from a possible exit from the euro.
Greece has already had two bailouts worth 240 billion euros from the euro zone and the International Monetary Fund, but since the crisis started its economy has shrunk by a quarter, unemployment is more than 25 percent and one in two young people is out of work.
Schaeuble, who makes no secret of his doubts about Greece's fitness to remain in the currency area, told a conference in Frankfurt: "Debt sustainability is not feasible without a haircut and I think the IMF is correct in saying that.
But he added: "There cannot be a haircut because it would infringe the system of the European Union."
He offered no solution to the conundrum, which implied that Greece's debt problem might not be soluble within the euro zone.
But he did say there was limited scope for "reprofiling" Greek debt by extending loan maturities, shaving interest rates and lengthening a moratorium on debt service payments.
Schaeuble also complained that he had not seen any sign of "prior actions" by the Greek government. Friday's vote should go some way towards disarming such criticism, although a further vote will be required to turn the "prior actions" into law next week if an agreement is reached, the Greek official said.
Debt Relief Chorus
European Council President Donald Tusk, who will chair an emergency euro zone summit on Sunday to decide Greece's fate, joined growing international calls for Athens to be granted some form of debt relief as part of any new loan deal.
Tsipras chaired a marathon cabinet meeting to finalize a package of tax hikes and pension reforms to send to euro zone authorities in a scramble to secure agreement at the weekend on a third financial rescue.
The leader of his junior coalition partner, Defense Minister Panos Kammenos, told reporters the Greek proposal had been approved by the cabinet and would be submitted shortly.
Tusk said a realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors.
"Otherwise, we will continue the lethargic dance we have been dancing for the past five months," he said.
Failure to reach a deal on Sunday, including releasing some money to enable Athens to cover debt service over the next few weeks, could lead to a collapse of Greek banks next week.
If there is no agreement, all 28 European Union leaders will discuss measures to limit the damage from a Greek collapse, including humanitarian aid, possible border controls and steps to mitigate the impact on neighbors, EU officials said.
Just how uncertain the coming days are was highlighted when European Central Bank President Mario Draghi voiced highly unusual doubts about the chances of rescuing Greece.
Italian daily Il Sole 24 Ore quoted the ECB chief, under growing fire in Germany for keeping Greek banks afloat, as saying he was not sure a solution would be found for Greece and he did not believe Russia would come to Athens' rescue.
Asked if a deal to save Greece could be wrapped up, Draghi said: "I don't know, this time it's really difficult."
The ECB is keeping shuttered Greek banks afloat with emergency liquidity capped until the weekend.
Even France, Greece's strongest supporter in the euro zone, acknowledged it was working on scenarios for a Greek exit from the currency area if weekend efforts to clinch a deal fail.
Under the agreed timetable, the leftist Greek government, which formally applied on Wednesday for a three-year loan from the European Stability Mechanism bailout fund, has until midnight to present convincing, detailed reform proposals.
Having won a thumping referendum majority to reject the austerity terms of a previous bailout plan, fired his turbulent finance minister and secured support from opposition party leaders, Tsipras is in a stronger position to impose tough measures and face down resistance at home.
But in a sign of the some of the challenges he will face, the leader of the far-left wing of his Syriza party came out to denounce any imposition of harsh measures on Greeks.
"We don't want add to the past two failed bailouts a third bailout of tough austerity which will not give any prospects for the country," Energy Minister Panagiotis Lafazanis said.
According to Athens daily Kathimerini, Greece is planning a reform package worth 12 billion euros over two years, more than previously planned to offset a return to recession after months of difficult negotiations with creditors.
Instead of growing by 0.5 percent this year, months of uncertainty and almost two weeks of capital controls mean "there are estimates of a recession of about 3 percent," Kathimerini said. Greece emerged only last year from a deep recession that shrank its economy by a quarter over six years.
European officials told Reuters on Wednesday that some large Greek banks may have to be shut and taken over by stronger rivals as part of a restructuring of the sector that would follow any bailout of the country.
One official said Greece's four big banks — National Bank of Greece, Eurobank, Piraeus and Alpha Bank — could be reduced to just two, a measure that would doubtless encounter fierce resistance in Athens.
German Bundesbank chief Jens Weidman said capital controls should remain in force in Greece until there was any deal, and that the ECB should not increase its liquidity assistance for Greek banks, without which they may collapse next week.
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