By Sergio Goncalves
LISBON (Reuters) - Portuguese leaders agreed tough new austerity measures on Thursday, joining a coordinated euro zone push that has so far calmed the markets' worst fears of a Greek-style debt crisis spreading.
Portuguese Prime Minister Jose Socrates and opposition leader Pedro Passos Coelho drew up steps to reduce the budget deficit by about 2 billion euros, half from spending cuts and half from increases in sales, income and profits taxes, a source close to the talks said.
The cabinet was expected to meet to approve the programme later in the day.
At the weekend, Portugal's government had said it would cut its 2010 deficit by one percentage point to 7 percent of GDP.
Like the harsh steps announced by Spain on Wednesday, the measures are the painful price indebted euro zone states must pay for protection by the 750 billion euro ($952.7 billion) safety net announced by the EU and IMF at the weekend.
"The crisis of the future of the euro is not just any crisis, it is the strongest test Europe has faced since 1990, if not in the 35 years before," said Chancellor Angela Merkel of Germany, whose voters resent shouldering much of the cost of the potential bailouts.
"This test is existential -- it must be passed."
World stocks have gained around 6 percent since the rescue package was announced. The euro was stronger on Thursday but still close to recent lows against the dollar.
The pan-European FTSEurofirst 300 has climbed more than 8 percent this week, regaining losses suffered as investors' confidence in the euro zone withered last week. But safe-haven gold continued to trade near record highs.
"It's going to be a long, challenging and bumpy road in order to stabilize the finances of many countries within the euro zone, but it's absolutely necessary that they take those first steps," said Henk Potts, equity strategist at Barclays Wealth.
State-run Lusa news agency cited an unidentified government source as saying one of the proposals includes a 5 percent wage cut for state companies' managers and politicians.
The Portuguese government has promised further to trim next year's deficit by an extra 1.5 percentage points.
Last year, Portugal's budget gap hit 9.4 percent of GDP after just 2.7 percent in 2008. Investor concerns have prompted a sell-off of Portuguese assets since January.
BRITISH CABINET MEETS TO CUT
The new coalition cabinet in Britain, a member of the EU but outside the euro currency, met for the first time on Thursday and agreed a 5 percent pay reduction for all ministers.
Less symbolic and more substantial cuts are high on its agenda to tackle a record budget deficit, marking the end of "spend-to-mend" policies advocated by former Prime Minister Gordon Brown in response to global downturn.
Those policies, applied by many governments, led to a glut of bond issuance which, in the case of highly indebted states, investors became reluctant to buy.
Spanish and Portuguese borrowing costs soared last week as investors fled peripheral euro zone government bonds.
But Portugal and Germany staged successful bond auctions on Wednesday after European Central Bank purchases of euro zone government debt in the market steadied investor nerves. The risk premium on Greek debt hit a three-week low.
A British government bond auction on Thursday was heavily oversubscribed.
Spanish Prime Minister Jose Luis Rodriguez Zapatero said on Wednesday Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs to meet EU deficit targets.
In a drive to tighten fiscal discipline and prevent a re-run of Greece's fraudulent statistics and ballooning deficit, EU Economic and Monetary Affairs Commissioner Olli Rehn unveiled proposals for greater budget coordination on Wednesday.
The key plank would make governments submit their draft budgets to Brussels for scrutiny and peer review by other member states before they are adopted by national parliaments. The Commission has no power to change national budgets but it would gain more time to influence the content upstream.
(Writing by Andrew Roche; editing by Mark Heinrich)
