UPDATE 3-Greece says to miss public sector reform target
* EU/IMF may freeze bailout funds for 3 months - official
* Greece hopeful of positive result at Eurogroup
By Lefteris Papadimas
ATHENS, July 3 (Reuters) - Greece will not meet targets on reforming its public sector by an end-of-the-week deadline set by its international lenders, Finance Ministry officials said on Wednesday, ahead of a meeting to decide on unlocking a further 8.1 billion euros in aid.
But the officials said Athens expected to reach agreement with its foreign lenders on all other issues before Monday's meeting of euro zone finance ministers.
The EU and IMF are unhappy with the progress Greece has made in reforming its bloated public sector. If they are not persuaded that Greece is on track to meet its reform goals, the lenders may freeze emergency aid for three months, a senior euro zone official said.
"No conclusion on the review, no disbursement," said the official, who declined to be named, adding this remained highly unlikely. "Is it a disaster - no. Is it uncomfortable? - Yep," the officials added.
Greece has been kept afloat by emergency loans alone since May 2010, a few months after the start of a debt crisis that sent shockwaves through the euro zone and threatened to push Greece out of the common currency.
The latest installment is one of the last big cash injections twice bailed-out Athens stands to get before the 240-billion-euro package expires at the end of 2014.
Athens needs to conclude talks with its lenders by the middle of the month to ensure it receives the latest aid tranche, which it needs to redeem about 2.2 billion euros of bonds in August.
Public sector layoffs are an incendiary issue in Greece, which is struggling through a sixth year of recession, record high unemployment and sinking living standards.
Athens has missed a June deadline to put 12,500 state workers into a "mobility scheme", under which they are transferred or laid off within a year, and officials said it would not be able to strike a deal on the issue by Monday.
"There is no chance that we will satisfy the current demands as they are set out," a senior Finance Ministry official said.
But Greek officials also sought to play down fears of what would happen if Greece did not receive aid payments in time, saying in a "worst-case scenario" it could compensate by issuing additional treasury bills.
"It won't be the end of the world," said a second Finance Ministry official, who spoke on condition of anonymity.
"In the worst case scenario we will have to increase the issuance of T-bills, we will delay repaying arrears and it could lead to further delays to payments."
Greek bonds have sold off in the past few weeks. Greek 10-year bond yields rose faster than longer-dated ones on Wednesday, with the Greek yield curve at its most inverted since April.
During a visit to Athens, German Foreign Minister Guido Westerwelle said Greece had to implement a series of reforms it had agreed to under the bailout.
"Things are moving in Greece... and we hope Greece continues on this path so that the pace of reforms does not decelerate," Westerwelle told reporters after meeting his Greek counterpart.
To press Athens to deliver on reforms without creating a full-blown crisis, its lenders might refuse to pay the full sum in one go and break it up into monthly payments instead.
Delays in pushing ahead with the hugely unpopular reforms have become a thorny issue in talks with lenders, who returned on Monday after a two-week break during which Prime Minister Antonis Samaras lost an ally in his ruling coalition and reshuffled his cabinet.
Kyriakos Mitsotakis, the newly-appointed administrative reform minister tasked with making the civil service smaller and more efficient, said he needed several months to get the scheme right.
"Clearly this cannot happen in a few days or a few weeks," Mitsotakis told Skai TV late on Tuesday.
He proposed compensating for the shortfall by speeding up firings of civil servants who have been found to have broken the law or those who were hired under false credentials.
Finance Minister Yannis Stournaras was due to hold a third round of talks in as many days with inspectors from the "troika" of EU, IMF and ECB lenders at 1600 GMT.
Other sticking points in Athens's negotiations with its lenders include an unpopular property tax and a possible reduction in a sales tax for restaurants.
The government also plans to ask its creditors to lower this year's privatisation target of 2.6 billion euros after failing to find a buyer for natural gas company DEPA.
Still, officials were hopeful of a positive outcome at Monday's Eurogroup meeting. "A favourable assessment of Greece at Monday's Eurogroup is to everyone's benefit," the Finance Ministry official said.
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