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(Reuters) - A deal on forming a Greek national unity government collapsed as the country headed toward an economic abyss and revived early Thursday the chances of former European Central Bank vice president Lucas Papademos heading the coalition.
Prime Minister George Papandreou said he was handing over to a coalition that does not exist and then failed to install an old-style politician and personal ally as premier.
On a day that was bizarre and chaotic even by Greek political standards, Papandreou wished his successor well and headed off to meet the president -- only for it to emerge that there was no successor due to feuding in the political parties.
Papademos, whose candidacy had seemed doomed, insisted that both the socialist and conservative parties sign written undertakings to support Greece's 130 billion euro ($176 billion) bailout, as demanded by the European Union, a government source said.
The outgoing prime minister had agreed to the terms laid down by Papademos, who as Bank of Greece governor oversaw the country's adoption of the euro in 2002, the source added.
Papademos made his demands for both major parties to back the bailout package, which includes austerity measures that are likely to prove highly unpopular, amid warnings that Europe is running out of patience with Greece and may cut a financial lifeline that the party leaders seem to take for granted.
Stefanos Manos, a former finance minister, said the behavior of Papandreou and conservative leader Antonis Samaras was undermining Greece's future in the euro and risking a possible return to the national currency.
"The Europeans are sick of us. Papandreou and Samaras don't realize they will stop giving us money and we will return to the drachma," said Manos. "They are going to destroy us. These problems demand decision-making. They can't decide on anything and they are fighting like cat and dog."
Greeks and the nation's international lenders have watched in growing horror for three days as party leaders feuded over a shrinking list of credible candidates to lead the national unity coalition after Papandreou's government imploded.
Greece will run out of money next month unless the new government agrees emergency funding with the European Union and International Monetary Fund, Greece's last remaining lenders.
Earlier, party sources said senior members of the socialist and conservative camps had settled on the speaker of parliament, veteran socialist Filippos Petsalnikos, as the new prime minister -- barring last-minute snags.
Papandreou then gave an emotional television address, supposed to be his last to the nation as premier, saying this deal had saved country's membership of the euro zone.
"I am proud that, despite the difficulties, we avoided bankruptcy and ensured the country stayed on its feet," he said. "I want to wish the new prime minister success, I will support the new effort with all my strength.
"Today, despite our differences -- political and social differences do exist -- we have put aside our fruitless conflict and disagreement," Papandreou said.
Papandreou and Samaras then began talks with President Karolos Papoulias on the new coalition. However, before leaders of smaller parties could join them to seal the coalition, the meeting was abruptly halted.
But snags had indeed emerged, with large sections of Papandreou's PASOK party and the conservative New Democracy refusing to back Petsalnikos.
Party sources said some lawmakers saw him as a pawn of Papandreou. "We wanted a strong a man who could handle all the economic issues," a socialist lawmaker said. "This candidacy is so close to Papandreou's policies, it does not signal the change the Greek people wanted."
The president's office said a meeting of party leaders would be held at 0800 GMT Thursday, although in the current chaotic atmosphere political talks are often delayed or fail to happen at all.
One of the few things that the parties agreed was that early elections be held on February 19. However, the government sources said that Papademos had also stipulated that the coalition's life could extend beyond that date if necessary.
The next government has much to do. As well as winning parliamentary approval for the bailout, it has to pass the 2012 budget and secure the latest 8 billion euro installment of Greece's original rescue that was pulled together last year, to avoid bankruptcy when big debt repayments come due in December.
For its part, the European Union needs to put out the fire in Greece to prove to international financial markets that it can tackle another blaze in Italy, a far bigger economy also in economic and political crisis.
Some lawmakers backed a return to the earlier plan, which had appeared stalled, of recruiting Papademos to give the new government the credibility that politicians lost long ago.
"The only solution is Papademos. If he accepts by tomorrow morning we will be able to form a strong government that will pull the country out of the crisis," socialist lawmaker Spyros Vougias told Reuters.
Papandreou discussed a Papademos candidacy late Wednesday with Samaras, and urged the conservative leader to contact the former ECB policymaker, a government official said.
Bank of Greece governor George Provopoulos made a rare intervention in Greek politics Wednesday.
"The uncertainty is hurting the economy and the banking system," Provopoulos told Reuters. "There must be a strong government that will work hard to ensure the country's future in the euro zone."
Greeks have pulled their savings from banks over the past week because of the deepening political crisis and fear of an exit from the euro, banking sources said. [nL6E7M94KI]
They withdrew as much as 5 billion euros -- nearly 3 percent of total deposits -- after Papandreou's shock call last week for a referendum on the euro zone bailout, said one banker, who declined to be named.
"Many people withdrew their money from banks Thursday and Friday and money couriers had a hard time supplying banks with cash to satisfy the emergency demand," said another banking source, who also requested anonymity.
Papandreou provoked uproar with the plan, due to the likelihood voters would have rejected the package, pushing Greece into bankruptcy and casting doubt on its future in the euro. Under intense pressure from home and abroad, he backed down but was forced to make way for the unity coalition.
Many wealthy Greeks moved their money into foreign banks last year as the crisis deepened. Now other people are demanding sometimes large amounts in euro banknotes, fearing that any bank savings might be converted into devalued new drachma if Greece is forced to revert to its national currency.
"We got to the point where customers ordered amounts of up to 600,000 to 700,000 euros in cash to take home -- unbelievable," the first banker said.
Additional reporting by Harry Papachristou, Lefteris Papdimas, George Georgiopoulos; and Angeliki Koutantou; Writing by David Stamp; Editing by Jon Hemming