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LISBON, July 4 (Reuters) - Portugal's bond yields dropped on Thursday and its stock market rose, reversing some of the previous day's sharp losses, as the prime minister and his junior coalition partner sought to defuse a political crisis.
After a first inconclusive meeting overnight, premier Pedro Passos Coelho and his rightist CDS-PP allies are due to meet again early on Thursday to try to heal a rift that risks derailing Lisbon's exit from its international bailout.
Diario Economico newspaper cited a government source as saying Passos Coelho was hoping to find a solution that would prevent a snap election and preserve his coalition government to take to the president later on Thursday.
The resignations of finance minister Vitor Gaspar and foreign minister Paulo Portas this week have threatened to deprive the government of a majority in parliament.
Another newspaper, Diario de Noticias, said the overnight meeting had been "very constructive", but inconclusive.
The returns investors demand to hold Portugal's 10-year bonds dropped to 7.3 percent after spiking to more than 8 percent on Wednesday for the first time since November. Lisbon's PSI 20 stock index was up 3.3 percent after sliding 5.3 percent the previous day, as hopes grew that the government can resolve its differences and avert an early election.
Analysts and local media said a solution to the worst rift since 2011 could involve a government reshuffle, giving more clout to the junior partner, the rightist CDS-PP, and possibly an easing of austerity policies implemented under the bailout.
President Anibal Cavaco Silva began crisis talks with political parties on Wednesday that will continue on Thursday and will also involve a meeting with Passos Coelho.
Passos Coelho has said his government will survive the crisis created by this week's resignations.
Portas's CDS-PP party has agreed to negotiate a solution and said its other two ministers would not resign, at least for now.
Despite efforts to mend the division - sparked by deep and growing misgivings in Portugal over the government's relentless austerity drive to meet the terms of its bailout - many analysts said it was only a matter of time before the government fell.
Lisbon's creditors - the European Union and International Monetary Fund - are due to start their next review of the economy on July 15, but that visit might now be delayed.
Passos Coelho has fought to keep Portugal on course to complete its 78 billion euro ($102 billion) bailout next year as scheduled, but austerity measures have pushed it deeper into its worst economic crisis since the 1970s.
Gaspar, architect of the spending cuts and tax hikes required by Portugal's lenders, quit as finance minister on Monday, citing an erosion in support for the bailout.
Portas resigned the next day because he objected to the appointment of Treasury Secretary Maria Luis Albuquerque to replace Gaspar.