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.
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 agreed to back 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 (9.3 billion pounds) 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."
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.
Hopes that a comprehensive deal was near grew in recent days 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.
Finance Minister Yannis Stournaras was scheduled to hold a teleconference with troika officials later on Tuesday to brief them ahead of a Euro Working Group meeting starting Thursday, the finance ministry said.
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."
(Additional reporting by Renee Maltezou, Karolina Tagaris and George Georgiopoulos; Writing by Deepa Babington; Editing by Michael Roddy)