BRUSSELS/ATHENS (Reuters) - A war of words between Greece and EU paymaster Germany escalated on Tuesday with Athens' new leftist prime minister rejecting what he called "blackmail" to extend an international bailout and vowing to rush through laws to reverse labor reforms.
A source close to the government said Greece intends to ask on Wednesday for an extension for up to six months of a loan agreement with the euro zone, on conditions to be negotiated. The source drew a distinction between a loan agreement and the full bailout program which the government insists is dead.
However hardline German Finance Minister Wolfgang Schaeuble dismissed the Greek gambit, telling broadcaster ZDF: "It's not about extending a credit program but about whether this bailout program will be fulfilled, yes or no."
Financial markets held their nerve after the latest talks among euro zone finance ministers broke down late on Monday and EU partners gave Greece until the end of the week to request an extension or lose financial assistance.
Many investors believe that whatever the rhetoric, both sides will find a face-saving formula before Athens' credit lines expire in 10 days. If they fail, Greece could rapidly run out of cash and need its own currency.
Greek banking sources said outflows of deposits increased on Tuesday after the failure of Monday's talks, but were not as severe as on some days last month around the election of a radical anti-austerity government.
The European Central Bank will review emergency funding for Greek banks on Wednesday but should not cut the lifeline this week, a source familiar with the situation said.
Both sides continue to insist Greece will remain in the euro.
Greek Prime Minister Alexis Tsipras told lawmakers in his Syriza party that the government - elected to scrap the bailout, repeal hated austerity measures and end cooperation with the "troika" of EU, ECB and IMF lenders - would not compromise.
Greece would no longer be treated like a colony of a pariah in Europe, Tsipras said. He accused Schaeuble of losing his cool and making degrading comments about Greece and said "certain circles" in the euro zone were out to undermine his government.
Schaeuble, 72, hammered home a take-it-or-leave-it message, wondering sarcastically whether Tsipras and his "famous economist" of a finance minister knew what they wanted or were making the right choices for the Greek people.
"The question still remains if Greece wants a program at all or not," he told reporters in Brussels after another day of meetings in Brussels. "On Feb. 28, at midnight, it's over."
Seasoned Eurocrats said Tsipras and his team seemed unprepared, unrealistic and oblivious to the dangers they are courting by refusing to roll over a 240-billion-euro credit deal and demanding easier terms.
Tsipras, 40, said he was in no rush and would not give in to "blackmail" from technocrats - a new hint that he hoped hitherto unresponsive EU leaders would step in and clinch a political agreement with him, which they declined to do last week.
Two of his EU peers who may be trying to broker a compromise - Cypriot President Nicos Anastasiades and Italian Prime Minister Matteo Renzi - telephoned the Greek leader on Tuesday, their offices said without giving details.
EU officials were unsure whether his fierce rhetoric was aimed at bolstering domestic support to avert a backlash against eventual compromise, or signaled he was retreating from a deal.
Greek Finance Minister Yanis Varoufakis - an academic economist - dismissed suggestions his only option was to ask for the bailout to be extended. He said he had been ready to sign a text floated by EU Economics Commissioner Pierre Moscovici that Greek officials said called for the "loan agreement" to be extended as part of a "transition" to a new deal.
The Greek plan to request an extended "loan agreement" may be an attempt to revive the Moscovici formula shunned by euro zone ministers.
French Finance Minister Michel Sapin suggested Greece could win leeway to run a smaller budget surplus of 1.5 percent of GDP and said clinching a deal was largely a matter of finding the right words. It was not clear whether Sapin's compromise ideas had any backing from Germany or other euro zone hardliners.
Tsipras raised the stakes by vowing to legislate fast to scrap labor market deregulation brought in by his conservative predecessor to meet international creditors' demands for less protection for workers' rights.
Jeroen Dijsselbloem, the Dutch finance minister who chairs the Eurogroup of 19 countries using the common currency, stuck to his guns, saying Athens must seek an extension: "It's really up to the Greeks. We cannot make them or ask them. We stand ready to work with them, also (over) the next couple of days."
Schaeuble and others emphasized the unanimity Greek faced across the table, with some ministers from eastern Europe noting that a minimum wage Tsipras plans to raise is as high as average salaries in some countries where taxpayers funded the bailout.
Some other ministers said the new Greek government did not seem to grasp the gravity of the situation or put forward coherent proposals in writing.
"It is troublesome that Greece has twice explained its goals orally, but no written presentation has been given yet," said Finnish Prime Minister Antti Rinne, one of the euro zone hawks.
Time is running short and investors marked down Greek stocks and bonds after Monday's debacle, some saying the risk of Greece exiting the euro had risen.
Three-year government bond yields rose more than a point to 19 percent, highlighting how far Athens remains unable to fund itself at manageable interest rates on the markets.
Dijsselbloem has said Friday is a deadline for a deal that would allow time for some national parliaments to ratify it.
A failure of the debt talks could lead to the imposition of capital controls, limiting money withdrawals and transfers, as happened in Cyprus in 2013.
Investment bank Barclays said the breakdown of talks had raised the risk that Greece would leave the euro zone and raised the prospect that Tsipras would have to call a referendum on whether to accept a deal with strings or ditch the euro.
Chris Scicluna of Daiwa Capital Markets said the failure raised the risk of a "disorderly conclusion". But he added: "All is not lost and we see no need for panic just yet."
Additional reporting by Adrian Croft, Robert-Jan Bartunek, Robin Emmott, Francesco Guarascio, Jan Strupczewski, Tom Koerkemeier, Alastair MacDonald and Barbara Lewis in Brussels and Jeremy Gaunt, Angeliki Koutantou and Deepa Babington in Athens; Writing by Alastair Macdonald and Paul Taylor; Editing by Giles Elgood and Paul Taylor