WRAPUP 1-Greece says EU could intervene, mechanism in works

* Greek PM says EU ready to intervene against speculation

* Euro zone ministers said working on support mechanism

* European Monetary Fund idea recedes to middle distance

* Unions set for another 1-day strike against austerity

By Harry Papachristou and Jan Strupczewski

WASHINGTON/BRUSSELS, March 10 (Reuters) - Greek Prime Minister George Papandreou said on Wednesday the EU stood ready to intervene if speculation against his country's debt continued and euro zone sources said finance ministers would discuss next week a mechanism to support Greece.

German and French leaders meanwhile made clear the idea of creating a European Monetary Fund faced big hurdles and could not solve the bloc's immediate debt crisis.

Papandreou told reporters in Washington that "if speculation ... against Greece continues", ideas were being discussed in Europe for the EU to "enter the fray and intervene". [ID:nWAT014212]

"The way to stop speculators ... is to make them feel that they will lose their money with the intervention of the EU, with instruments which have not been operationalised yet, but have been discussed and set in motion," he said.

In Brussels, sources involved in preparations for a meeting of euro zone finance ministers next Monday said they would discuss a support mechanism that Athens could use to finance its borrowing if necessary. [ID:nLDE6291YA] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Europe's fight with debt [ID:nLDE6211JD] Graphic on euro zone debt crisis r.reuters.com/fyw72j Q+A on European Monetary Fund idea [ID:nLDE6280CY] Story on debate over banning sovereign CDS [ID:nLDE6292FX] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

They gave no details but officials have talked of the possibility of German and French state banks either buying Greek bonds or guaranteeing purchases by commercial banks.

The finance ministers are likely to stress at their meeting next week that Greece is able to finance itself on capital markets for now, holding any mechanism in reserve.

Struggling with a debt mountain of around 300 billion euros -- equivalent to 125 percent of its national output -- Athens needs to roll over some 20 billion euros in debt between April 20 and the end of May and is urgently seeking to reduce its borrowing costs.

SPREAD WIDENS

The premium investors charge to hold Greek bonds rather than German benchmark issues widened to 310 basis points on Wednesday, the highest since Papandreou began a tour of Luxembourg, Germany, France and the United States to seek support for his austerity plan.

Papandreou says Greece wants to be able to borrow at the same cost as other euro zone countries such as Ireland, which has a spread of 107 bps over German bunds.

But with Germany, Europe's biggest economy, stressing that Athens has not requested aid and has no problem accessing the market, it remains unclear what level of risk premium might trigger a European support mechanism.

German Chancellor Angela Merkel and French Prime Minister Francois Fillon, meeting in Berlin, agreed that the idea of a European Monetary Fund was a possible medium-term instrument to prevent debt crises recurring but should not weaken the EU's existing budget discipline rules.

Fillon said both countries wanted to avoid renegotiating the EU's Lisbon Treaty, which took years to ratify. Merkel has said an EMF would require changes to the treaty.

German Economics Minister Rainer Bruederle said in a letter obtained by Reuters that any such fund should act only if the stability of the whole euro area were threatened by the possible insolvency of one member. [ID:nLDE629198]

In extreme cases a fund could buy up debt of an insolvent government at a heavy discount, he said in the letter to Finance Minister Wolfgang Schaeuble dated March 8.

European Central Bank President Jean-Claude Trichet said he was not rejecting the idea of a fund but needed to take a closer look at the proposal. His German ECB colleagues Axel Weber and Juergen Stark have sharply criticised the fund idea this week.

GREEK STRIKE SET

Greece's main private and public sector trade unions have called another one-day national strike for Thursday, stepping up protests against the lastest 4.8 billion euro package of civil service pay cuts, a pensions freeze and tax increases.

Asked about protests, Papandreou said: "Demonstrators have the right to demonstrate but the crisis is not this government's fault." His socialist administration took office last October and shocked markets by sharply revising up the budget deficit forecast of its conservative predecessor.

Papandreou said the austerity measures adopted last week already took account of the more pessimistic outlook for economic growth announced by the government on Wednesday.

While unions attack the measures, designed to slash that deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, European finance ministers are expected to applaud the government's efforts.

"Everybody will agree that Greece is very much on the right track, that we are no longer at an acute stage with Greece now," one euro zone source close to the ministers' meeting said.

"A week ago everybody was pressing Greece to come up with the goods -- and they did. Now Greece is pressing everybody to come up with rewards," the source said.

Greece, Germany, France and Luxembourg have called for speedy action to limit or even ban so-called naked credit default swaps, whereby a buyer has no stake in the underlying asset being insured against default.

EU finance ministers will discuss possible action next Tuesday, but Britain's top financial regulator said there was no case for emergency action because of Greece. (additional reporting by Gernot Heller and Erik Kirschbaum in Berlin, Sophie Taylor in Paris, George Georgiopoulos and Ingrid Melander in Athens; writing by Paul Taylor, editing by Noah Barkin)