Greece's embattled prime minister sacrificed his finance minister today to force through an unpopular austerity plan and avert bankruptcy, while EU powers Germany and France promised to go on funding Athens.

After a week of political turmoil and violent protests in Athens, Greek prime minister George Papandreou put his main socialist rival into the finance ministry in a bid to unite his fractious party behind spending cuts, tax rises and privatisations crucial to securing further IMF-EU assistance.

In Berlin, the leaders of Germany and France, long at odds over how to involve private holders of Greek bonds in a new rescue package for Athens, said they agreed on a mild solution favoured by Paris and the European Central Bank.

The outline agreement between German chancellor Angela Merkel and French president Nicolas Sarkozy on a second bailout package boosted the euro and reduced risk premiums on Greek and other peripheral euro zone bonds after a week-long financial rout.

Ms Merkel retreated from German demands that bondholders be forced to shoulder a "substantial" share of a Greek rescue, saying she will work with the European Central Bank to avoid disrupting markets.

"We would like to have a participation of private creditors on a voluntary basis," Ms Merkel told reporters. This "should be worked out jointly with the ECB and there shouldn't be any dispute with the ECB on this."

Mr Sarkozy said France and Germany want a new programme in place as soon as possible. "There is no time to lose," Mr Sarkozy said.

New Greek finance minister Evangelos Venizelos, promoted from the defence ministry with the extra status of deputy prime minister, said in his first statement to reporters: "The country must be saved and will be saved."

Mr Venizelos said tonight Greece will seek approval from euro zone finance ministers on Sunday to agree to some changes in a mid-term austerity plan that parliament is expected to pass.

"The midterm plan is the passport for reliability not only for the fifth tranche but for the problem of the viability of the public debt," Mr Venizelos told Mega TV channel after he was appointed in a cabinet reshuffle.

Analysts said the socialist heavyweight was a second-best choice after Mr Papandreou failed to persuade respected former ECB vice-president Lucas Papademos to come aboard, but it enabled him to dump several ministers who had obstructed reforms.

Outgoing finance minister George Papaconstantinou, who negotiated a first €110 billion bailout for Athens last year and had the confidence of international lenders and markets, was moved to the environment ministry in a crisis-driven reshuffle.

Mr Papandreou will seek a parliamentary vote of confidence in the new cabinet next Tuesday after a debate starting on Sunday.

Greek market reaction was positive with bank shares rising nearly 8 per cent and the Athens stock market index climbing almost 4 per cent.

Bond markets remain spooked by fears of a Greek default and most economists are overwhelmingly sceptical that Greece can ever repay its debt mountain, which has reached €340 billion or 150 per cent of the country's annual economic output.

Calculations based on five-year credit default swap prices from Markit show an 81 per cent probability of Greece eventually defaulting based on a 40 per cent recovery rate.

Jim O'Neill, the chairman of Goldman Sachs Asset Management, told Reuters Insider television the risk of a Greek default was "getting closer" and criticiseded European policymakers for sparring with each other in public. "It is like open theatre," he said.

But Michael Leister, a rate strategist at WestLB, said the common front shown by France and Germany had moved the EU "a couple steps away from the abyss", reducing fears of a disorderly default in the near-term.

The ECB and the EC have warned that any form of private sector involvement that causes a "credit event" or a downgrading of Greek debt to default status could wreak devastating damage on the euro zone.

They opposed a plan proposed by German finance minister Wolfgang Schauble for private holders of Greek debt to swap their bonds for new ones with maturities that were seven years longer, giving Greece extra breathing room.

Ms Merkel backed away from that idea today, saying she now believed a softer option based on the 2009 Vienna Initiative - a voluntary deal by banks to maintain their exposures in eastern Europe at the height of the financial crisis - was a "good foundation" for a Greek deal.

"The quicker we get a solution the better," she said, brushing aside reports that Berlin wanted to delay a deal until September to try to force a bigger private sector role.

Both Ms Merkel and Mr Sarkozy said ECB backing was crucial for any deal. Any downgrading to default could have led the central bank to refuse to accept Greek bonds as collateral, depriving Greek banks of liquidity on which they are dependent.