Athens: Greece inched towards clinching key debt and bailout funding deals as Italy prepared a major liberalisation programme aimed at breathing new life into the economy on Friday.

Greek Prime Minister Lucas Papademos was due to meet with global bank group representatives after late-night talks on Thursday as his finance minister held discussions with senior EU-IMF auditors on a new eurozone rescue package.

"We are in a very critical negotiation happening in a very short timeframe," government spokesman Pantelis Kapsis told a Radio station.

"We hope it will conclude very soon," he said.

Other reports in the afternoon said an accord had been reached but there was no official confirmation amid mounting speculation as to the content of a deal.

The main FTSE/Athex index showed a gain of 3.47 percent for the day as investors bet on good news but there were no developments by the close.

The main European markets were slightly lower after a positive week despite Standard and Poor's rating downgrades for nine of the 17 eurozone nations.

"Significant headwinds still remain, not least ... Greece," said Michael Hewson, market analyst at trading group CMC Markets.

"Even if a deal is reached it won't even begin to solve Greece's problems of a shrinking economy and a growing debt burden," he added

German Foreign Minister Guido Westerwelle meanwhile insisted Friday that endless rescue packages for indebted economies are not the answer to the eurozone's woes.

"The debt economy itself has reached its limits," Westerwelle told the Brookings Institution think-tank in Washington.

"Rescue packages and short-term liquidity are not a solution to the crisis. They are buying us time in which to address the root causes -- no less, but also no more."

Greece has a looming loan repayment worth 14.3 billion euros on March 20 which it cannot honour without financial assistance, and a deal on a voluntary debt writedown must be reached soon if it is to be implemented in time.

Greece is seeking to slash around 100 billion euros ($129 billion) from its huge debt through a voluntary bond swap with creditors, a process that would unlock a new eurozone rescue package worth 130 billion euros overall.

Under the so-called private-sector initiative (PSI), banks and other financial institutions are expected to take at least a 50 percent "haircut" on their Greek debt, which would remove about 100 billion euros from Athens' massive debt burden of more than 350 billion euros.

The talks hinge on the interest rate to be offered for new bonds which will replace maturing debt that is being written down, with Greek media reporting Friday that a deal seems close on a flexible rate of around four percent.

The Kathimerini daily said the new bonds would be offered with a sliding scale of 3.0 to 4.5 percent over time, which would imply a much bigger writedown of some 68 percent.

In a sign that an agreement could be near, the International Monetary Fund has said it is ready for talks on extra rescue funds needed to keep Athens from defaulting in March.

Greece wants an outline of the deal to be ready by Monday, and a full agreement by January 30 when the European Union is scheduled to hold a summit.

Greece is under pressure from the EU and IMF to revise its private-sector wage agreements to reduce labour costs and improve competitiveness as part of the new bailout.

Greek unions say such a measure would only exacerbate a deep recession brought about by two years of austerity measures already adopted under the EU-IMF economic adjustment plan.

Meanwhile Italy's technocratic government under Prime Minister Mario Monti was discussing Friday reforms to liberalise cosseted sectors and breathe new life in the country's moribund economy.

Numerous sectors of the Italian economy remain sheltered by restrictions from competition, but with the country's economy likely to have entered a recession and little room for more austerity, reforms to unlock growth have become a top priority.

With the country's economy set to contract between 1.2 and 1.5 percent this year according to the Bank of Italy, quick action by the government to spur growth will be key to convincing markets Italy will be able to keep on top of its massive debt worth 120 percent of GDP.

Nervous investors have driven Italy's borrowing costs above six percent and even seven percent at times, levels that economists consider unsustainable in the long term for slow-growing economies with low inflation.

"The Italian economy is very constrained and liberalising its main sectors, something which has been talked about for 30 years, could lead to potential growth of two percent" compared to the average growth rate of one percent achieved over the past decade, said Guiliano Noci, a professor at Milan's MIP Politecnico business school.

(Agencies)