By Lefteris Papadimas and Erik Kirschbaum
ATHENS/BERLIN (Reuters) - Prime Minister Alexis Tsipras accused Greece's creditors on Tuesday of trying to "humiliate" Greeks with more cuts as he defied a growing drumbeat of warnings that Europe was preparing for his country to leave the euro.
The unrepentant address to lawmakers after the collapse of talks with European and IMF lenders at the weekend was the clearest sign yet that the leftist leader has no intention of making a last-minute U-turn and accepting austerity cuts needed to unlock frozen aid and avoid a debt default within two weeks.
Financial markets, for months indifferent to wrangling over releasing billions of euros of aid for Greece, reacted with mounting alarm.
European stock markets hit their lowest level since February and the risk premium on bonds of other vulnerable euro zone states leapt in one of the sharpest episodes of contagion since the height of Europe's debt crisis in 2012.
The White House warned that agreement was needed to avoid shaking financial markets further and Tsipras assured U.S. Treasury Secretary Jack Lew that Athens aimed to bridge the differences with creditors.
But with senior German lawmakers now openly discussing the once-taboo prospect of a "Grexit" from the single currency area, his fiery words suggested confrontation rather than reconciliation.
"I'm certain future historians will recognise that little Greece, with its little power, is today fighting a battle beyond its capacity not just on its own behalf but on behalf of the people of Europe," he said in a televised speech to legislators in his Syriza party, drawing loud applause.
Tsipras charged that the lenders were politically motivated in demanding pension cuts and tax hikes that hurt the poor, and their aim was to "humiliate not only the Greek government - this would be the least important - but humiliate an entire people".
European Commission President Jean-Claude Juncker reacted angrily, accusing the Greek prime minister of misleading the public and insisting that he had made clear that he was personally against hiking taxes on power and pharmaceuticals. "And the prime minister knows that," he said.
The rhetoric from Athens left it unclear whether Tsipras was preparing to default and risk economic collapse as the price of standing firm, or betting - wrongly according to creditors - on a last-minute effort by Europe to save Greece.
German Chancellor Angela Merkel, who has held repeated phone calls with Tsipras in recent weeks to press him to agree on reforms with EU/IMF negotiators, struck a despondent note, saying it was unclear if a deal could be found when euro zone finance ministers meet on Thursday in Luxembourg.
"Unfortunately, there is little new to report," she told a news conference, repeating that Greece must meet its obligations. "I have always said I want to do everything possible to keep Greece in the euro zone. I remain dedicated to that."
DEFAULT, GREXIT LOOM
Greece is set to default on a 1.6 billion euro ($1.8 billion) debt repayment to the International Monetary Fund on June 30 unless it receives fresh funds by then, possibly driving it towards the exit of the euro zone.
That could begin if the government had to impose capital controls to stem a bank run and was obliged to pay wages, pensions and suppliers in IOUs because of a shortage of euros.
Lawmakers in Merkel's conservative party and her centre-left coalition partners were more blunt than the chancellor in warning that a Greek euro zone exit was on the cards.
"In the event a solid reform package is not presented, then a 'Grexit' would have to be accepted if necessary," said Michael Grosse-Broemer, a senior lawmaker in Merkel's Christian Democrats. "I'm not so sure any more if the Greek government is really interested in averting damage for the people of Greece."
Finnish Prime Minister Juha Sipila, whose country is among the most hawkish creditors, said it would take "a miracle" to reach a solution next week, but that was still everyone's aim.
European Commission Vice-President Valdis Dombrovskis said publicly that euro zone members were discussing what might happen if Greece failed to agree on a deal with lenders.
The bloc has no legal basis for forcing a country out, but Athens might end up with a de facto parallel currency, paving the way for a formal exit from the euro.
Though all sides - Athens and the European Commission, European Central Bank and IMF - want to avoid such a scenario, all have dug themselves into entrenched positions blaming the other side for the collapse of talks at last weekend.
With trust between the two sides now badly damaged, there were fears the situation could slip out of control.
"What is absolute, is that the timeframe is very tight now and even with the best will in the world, on tight timeframes accidents can happen," Irish Finance Minister Michael Noonan told a parliamentary committee in Dublin.
Officials from the Eurogroup Working Group held a conference call in the afternoon to prepare the ground for Thursday's finance ministers meeting, but no new progress was made, according to sources.
EU officials denied reports that any emergency summit of euro zone leaders was being planned for next Sunday. If anything, the Eurogroup finance ministers might meet again.
With speculation gripping markets, officials denied a report in German daily Bild that Athens was planning to delay the June 30 payment to the IMF by six months. Officials earlier denied a Sueddeutsche Zeitung story that preparations were under way for capital controls to be imposed as early as next weekend.
CLOSE TO LIMITS
There was little sign of public panic in Athens, but increasingly worried leaders of pro-euro opposition parties sought briefings from Tsipras and implored him to strike a deal swiftly to prevent an economic collapse.
"I called on the prime minister to consider that the Greek economy is desperately close to its limits," Stavros Theodorakis, leader of the centrist To Potami party, the fourth-biggest in parliament, said after meeting the prime minister.
He said Tsipras had assured him there were still "two or three" steps Athens could take to break the deadlock in the talks, provided the creditors also gave ground. The 17 lawmakers Theodorakis commands would vote for any deal in parliament that kept Greece in the euro, he added.
Faced with a backlash within Syriza over concessions sought by the lenders, the support of parties like Potami and the centre-left PASOK could prove crucial for Tsipras in voting through any deal.
Officially, Syriza has ruled out such an option, saying an agreement must pass with the support of its own lawmakers.
In a last-ditch effort to repair the breakdown, Austrian Chancellor Werner Faymann is due in Athens on Wednesday after coordinating with Juncker.
(Additional reporting by Michael Shields in Vienna and Andrius Sytas in Vilnius, Writing by James Mackenzie and Deepa Babington; Editing by Paul Taylor and Robin Pomeroy)