* Papandreou seeks parliamentary support for austerity
* Euro zone finance ministers meet in Luxembourg
* Minister hopes for agreement on loan tranche tonight
* Bond fund chief says Europe risks wasting billions
* Signs of economic policy tensions across Europe
(Adds minister saying hopes for agreement on tranche tonight)
By Barry Moody and John O'Donnell
ATHENS/LUXEMBOURG, June 19 (Reuters) - Prime Minister George Papandreou asked Greeks on Sunday to support austerity steps and avoid a "catastrophic" default, as European finance ministers discussed extending tens of billions of euros of aid to Athens.
Addressing the Greek parliament, Papandreou appealed for the nation to accept deeply unpopular tax hikes, spending cuts and privatisation plans which international donors have demanded as a condition for the aid.
"The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country's credibility," Papandreou said at the start of a confidence debate on his new crisis cabinet. [ID:nLDE75I06S]
Greek officials have said the country will face default in mid-July if the European Union and the International Monetary Fund do not hand over a 12 billion euro tranche of emergency loans by then.
Euro zone finance ministers began a two-day meeting in Luxembourg on Sunday evening to decide whether to disburse that tranche, part of a 110 billion euro ($156 billion) bailout of Greece launched in May last year. They will also discuss proposals for a second bailout that could be worth some 120 billion euros and keep Greece funded through 2014.
Spain's economy minister told reporters on the sidelines of the meeting that ministers hoped to reach agreement on Sunday night on disbursement of all of the next loan tranche to Greece.
"We're still discussing... We hope (to have a deal). That's why we are here tonight," Elena Salgado said. [ID:nBRU011567]
The finance minister of Germany, where political opposition to spending taxpayers' money on bailing out Greece has been rising, was more equivocal.
"We will work today and tomorrow so that we get as far as possible," Wolfgang Schaeuble said. "Greece must fulfill all the necessary preconditions so that it can be paid out on time. Europe will do its part." [ID:nLDE75I0AT]
Other stories on euro zone crisis [ID:nLDE68T0MG]
Graphics on Europe's debt crisis r.reuters.com/hyb65p
Bank exposure interactive map r.reuters.com/max89r
Analysis on Greece in denial [ID:nLDE75F1PT]
Facing public protests and dissent in his Socialist party, which has a slim majority in parliament, Papandreou reshuffled his cabinet last week and called a confidence vote for next Tuesday in an effort to push his reforms through the legislature this month.
Political analysts think he is likely to succeed, but public opposition means it is unclear if he can stick to austerity over the long term. Over 10,000 people protested in front of parliament on Sunday, chanting: "We won't pay! We won't pay" and thrusting their open hands forward in a traditional insult.
Opposition leader Antonis Samaras demanded in parliament that Papandreou quit to pave the way for early elections and a renegotiation of the terms of Greece's current bailout.
Greece, with a public debt worth more than 150 percent of its annual economic output and rising, missed debt targets in its initial bailout plan partly because of a deep recession.
In the proposed new bailout scheme, private investors would for the first time share the burden, pledging to maintain their exposure to Greece by voluntarily buying about 30 billion euros of sovereign bonds as their current holdings matured.
But such a debt rollover would be complex and controversial, financially and legally. Key details have not been worked out, and euro zone finance ministers are expected to discuss them in Luxembourg.
Yields on bonds of indebted euro zone states rose sharply last week as markets speculated Greece might fail to obtain more aid. Many investors think that even if it does, its debt problem is so large that a more radical solution is needed, such as imposing deep losses on its creditors.
The head of Pimco, the world's largest bond fund, said in an interview published on Sunday that Europe risked wasting more money for nothing if it kept pumping billions into the weak Greek economy.
"After a year, every indicator has unfortunately worsened, despite the incredible quantity of financial assistance," Mohammed El-Erian told Italy's Corriere della Sera daily.
"All of this has terrible human consequences and it's associated with a transfer of liabilities from private creditors to European taxpayers. Why? Very little is being done to deal with the excess of public debt, and the conditions for higher growth are not being put in place.
"Further on, if this approach is kept up, more money will be wasted to save private creditors and the risk of a disorderly restructuring of the debt will be greater." [ID:nLDE75I03L]
There were signs across Europe on Sunday of tensions over austerity measures and economic reforms.
In Madrid, tens of thousands of people marched against the government's handling of an economic slump and the "Euro Pact", which was agreed by euro zone politicians to improve competitiveness across the bloc and has led in Spain to reforms giving companies greater power to hire and fire. [ID:nLDE75I07J]
In Dublin, which obtained an 85 billion euro bailout last year, the Sunday Times quoted an unnamed European Central Bank source as criticising Finance Minister Michael Noonan's call to impose losses on senior bond holders in two failed banks.
"It was a good soundbite for the cameras ... Considering the Greek situation, it was the worst possible time for him to make an impression," the source was quoted as saying. The ECB has opposed making those bond holders pay on the grounds that it might destabilise financial markets.
"By the time it comes to paying back the bonds next autumn, Greece may have defaulted. If Greece defaults, Ireland is next," the source said. [ID:nL6E7HJ021]
In Milan, Prime Minister Silvio Berlusconi said Italy would take the measures it considered right to keep its public finances in order. On Friday, credit rating agency Moody's warned it might cut Italy's rating out of concern over Rome's ability to reduce its heavy public debt burden. [ID:nR1E7GP02H] (Writing by Andrew Torchia; Editing by Andrew Heavens)