Greece is in turmoil and the world economy in limbo after Prime Minister George Papandreou apparently abandoned his explosive plan to put a European rescue deal to a referendum.

The drama in Greece overshadowed the G20 summit of world leaders in the French Mediterranean resort of Cannes, where U.S. President Barack Obama implored European leaders to swiftly work out a eurozone plan to deal with the continent's crisis, which threatens to push the world back into recession.

At the same time, fears rose Thursday for the future of Italy's economy.

"With one eye on Greece, the leaders are keeping the other on Italy, a much larger economy which also has a towering debt and a toppling government," the CBC's Terry Milewski reported from Cannes. Italy is Europe's third-largest economy. On Thursday, the yield on Italian bonds hit a 14-year high, indicating investor uncertainty and raising the cost of borrowing money to keep the government functioning.

The next sign of further trouble for North America would be teetering Italian banks, said CBC senior business correspondent Amanda Lang. "If we see banks starting to fail, you get the ripple effect that could bring it back home to us, bring it to North American shores."

Papandreou sparked a global crisis this week when he announced plans to put the latest European deal to cut Greece's massive debt - a hard-fought accord that took months of negotiations - to a popular vote.

The idea horrified other EU nations, Greece's creditors and world financial markets, as investors worried that Greece could be forced into a disorderly default.

Faced with mounting opposition at home and abroad, Papandreou withdrew the referendum call after the main opposition conservatives indicated they backed the debt deal. With them potentially on board, his finance minister argued, there was no longer a need to put the issue to the Greek people.

Stocks rose sharply in North America and Europe on news the referendum plan wouldn't proceed, as well as a surprise move by the European Central Bank to cut interest rates. The Dow Jones industrial average jumped 208 points, or 1.8 per cent, to close above 12,000 for only the third time since early August. In Toronto, the S&P/TSX composite index rose 226 points, or 1.85 per cent, to 12,468.35.

Papandreou's government was still in danger, however. The prime minister faces a crucial confidence vote in Parliament at midnight Friday, after two days of acrimony that saw many of his own lawmakers and ministers rebel. Many asked for his resignation, furious that his insistence on a referendum had endangered the debt deal and led European leaders to question Greece's treasured participation in the euro, the common currency used by 17 EU nations.

The governing Socialists have a slim two-seat majority in the 300-member legislature, and at least one lawmaker has publicly threatened to vote against the Papandreou government.

In an address to Parliament, Papandreou stressed his only interest was Greece's well-being, and hinted he was willing to eventually step down.

"I don't care about being re-elected. I am interested in saving the country," he said, adding that he was open to the mounting calls for the creation of a transitional government that would secure the debt deal, and make sure Greece receives the next, vital installment of its existing bailout funds. After that, he said, he would be open to holding elections.

Let talks start now

"Let everything be discussed - the makeup of the government and anything else .... I am not glued to my seat," Papandreou said.

"My position is crystal clear: let talks start immediately to create a formation that is broadly accepted, efficient and able to deal with the national interest in this difficult time for the country."

Once Greece is on an even course, he said, "then, of course, we can head to an election process. But a government resignation would have left the country in the lurch."

An angry Antonis Samaras, the head of the main opposition conservatives, insisted Papandreou had to go and dispelled any impression of unity. He argued he had already agreed to back the vital new deal, and demanded quick elections - within the next six weeks if possible.

"Mr. Papandreou pretends that he didn't understand what I told him," he said. "I called on him to resign." Papandreou "nearly pulled the universe apart to supposedly persuade me to agree to something that I had already said was unavoidable."

Greek borrowing costs rise

Samaras then led his lawmakers in walking out of the parliamentary debate on the confidence vote - although a party official told The Associated Press they would attend the vote itself on Friday.

Amid the political mayhem, Greece's cost of borrowing ballooned, with the interest demanded by markets to buy Greek 10-year bonds exceeding 31 per cent - compared with two per cent for European powerhouse Germany.

Papandreou's surprise referendum announcement so startled world leaders that French President Nicolas Sarkozy and German Chancellor Angela Merkel, two architects of the debt deal, summoned Papandreou to Cannes for emergency talks Wednesday.

There, they made clear that if any referendum were held, it would determine whether Greece stayed in the eurozone, and said Athens wouldn't get its $11 billion (?8 billion) installment of last year's $152 billion (?110 billion) bailout until the dust had settled.

On Thursday, Obama declared his solidarity with Sarkozy and Merkel, telling G20 leaders that resolving the financial crisis was "the most important aspect of our task over the next two days."

But with parts of the rescue undefined, he added: "We're going to have to flesh out more of the details about how the plan will be fully and decisively implemented."

For his part, Canadian Prime Minister Stephen Harper offered a more soothing take, saying "cooler heads will prevail."

'Surreal farce'

The drama in Greece sent immediate ripples throughout Europe. Premier Silvio Berlusconi's government in Italy was teetering after it failed to come up with a credible plan to deal with its dangerously high debts, and Portugal demanded more flexible terms for its own bailout.

"It was a surreal farce today ... worthy of a Monty Python film," said Alexis Tsipras, head of a small left-wing party.

Greece's new debt deal would give the country an extra $179 billion (?130 billion) in rescue loans from the rest of the eurozone and the International Monetary Fund - on top of the $152 billion it was granted a year ago. It would also see banks forgive Athens 50 per cent of the money it still owes them. The goal is to reduce Greece's massive debts to the point where the country is able to handle its finances without constant bailouts.

Polls indicate the Greek public is close to the breaking point after more than 20 months of harsh austerity cuts and tax hikes. Recent opinion surveys show 90 per cent oppose Papandreou's policies and just 20 per cent support his party.

Underlining that point, 300 people held a peaceful anti-austerity protest in central Athens late Thursday.

The past does not bode well for Papandreou: The two other European governments besides Greece that have received bailouts - Portugal and Ireland - have seen their governments fall during the economic turmoil.

Source: CBC News