Markets looked for reassurance from a meeting Wednesday in Berlin by Chancellor Angela Merkel, the International Monetary Fund chief Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.
Greece has said it can't pay debts coming due May 19 without euro45 billion ($59.8 billion) in bailout loans from the countries that use the euro as well as the International Monetary Fund. But Germany, which would be the biggest single contributor with some euro8.4 billion, has insisted that Greece agree to a lasting austerity plan before it will approve its share of support.
That has been interpreted as reluctance and raised fears Greece might not get the money it needs to stave off collapse. A default would be a serious blow to the shared euro currency and could undermine confidence in other country's finances.
Finance Minister Wolfgang Schaeuble insisted that legislation to free up the German contribution could get through both houses of parliament within a week - as early as May 7 - if Athens wraps up its talks with the International Monetary Fund and the European Union quickly enough.
Foreign Minister Guido Westerwelle echoed that commitment, insisting that Germany is ready to act quickly in order to protect the euro - as soon as Greece has made it clear it will do its part.
"We will protect our currency and this is in the deepest interest of every European citizen," Westerwelle told reporters.
Market worries intensified Tuesday when Greek bonds were downgraded to junk status and Portuguese bonds lowered two notches. The move by the Standard & Poor's ratings agency fueled fears that Greece's crisis will spread to countries with troubled finances such as Spain and Italy that are too large to be bailed out.
The downgrade "has sent the bond markets into meltdown and equity investors toward the exits," said Michael Hewson, an analyst with CMC Markets in London.
Speaking during a cabinet meeting Wednesday, Greek Prime Minister George Papandreou said that every EU member must "prevent the fire that intensified through the international crisis from spreading to the entire European and global economy."
Papandreou insisted Greece was determined to bring its economy into order.
"We will show that we do not run away. In difficult times we can perform â€" and we are performing â€" miracles," he said, adding that "our government is determined to correct a course that has been followed for decades in a very short time."
Yet many Germans oppose the Greek bailout; a poll by Dimap, for German newspaper Die Welt and French broadcaster France 24, showed that 57 percent of Germans thought that aid was a bad decision while just 33 percent favored such a move. The survey was conducted earlier this month and surveyed 1,009 people. No margin of error was given.
Underscoring the German debate is an important election in Germany's most populous state on May 9. Merkel is also coming under pressure from within her own party, the conservative Christian Democratic Union, over her handling of the Greek issue.
A government spokesman, who refused to give his name because of the sensitivity of the issue, said the Finance Ministry had already prepared draft legislation for parliament to approve the loan guarantees.
In the meantime, stocks sagged and markets sold off Greek bonds with a vengeance. Investors appeared to anticipate Athens would eventually have to default or restructure its debt payments at some point even if the bailout gets it past May 19, when it has debt coming due.
A key indicator of risk - the interest rate gap, or spread between Greek 10-year bonds and the benchmark German equivalent - hit an astonishing 9.63 points, a massive jump from around 6.4 points on Tuesday. The bigger the spread, the greater the fear Greece will default.
It translates into Greek borrowing costs at the moment of nearly 13 percent for a 10-year bond, four times what Germany pays to borrow.
Authorities in Athens halted short-selling of stocks for two months, helping the exchange to climb 2.1 percent, after a five-day losing streak. The ban will remain in force until June 28.
In Athens, German lawmakers met with Greek Finance Minister George Papaconstantinou, while some 200 people protested the government's hiring freeze on civil servants.
In Lisbon, Portuguese Prime Minister Jose Socrates and the leader of the main opposition party were set to hold emergency talks on steering the country out of its financial crisis as the Lisbon stock market plunged for a second day, sliding 6.2 percent.
Portugal's Prime Minister Jose Socrates and the leader of the main opposition party agreed on measures to help steer the country out of a financial crisis that threatens to engulf the euro zone's poorest member. The pair held emergency talks Wednesday as the Lisbon stock market recorded steep losses for a second straight day.
Socrates said, after the meeting, that the government and opposition would work together.
"We are ready to do whatever it takes to meet our budget targets," he said.
Still, the specter of the contagion spreading was prevalent.
"There is a very serious risk of contagion, it's something like post-Lehman period. Everybody is panicking and there is a lot of fear in the market," Nicholas Skourias, chief investment officer at Pegasus Securities in Athens told AP Television News. He was referring to the 2008 collapse of U.S. investment bank Lehman Brothers, which sped up the world financial crisis.
"I think that today we will have a lot of pressure as well because there is this fear of contagion."
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Associated Press Writers Juergen Baetz, Verena Schmitt-Roschmann in Berlin, Barry Hatton in Lisbon, Nicholas Paphitis and AP Television Producer Nathalie Rendevski Savaricas in Athens contributed to this report.
