Bailout beckons as Portuguese PM quits

All opposition parties united to defeat prime minister Jose Socrates' proposals in a parliamentary vote, saying the belt-tightening went too far on the eve of a summit of European leaders.

But their decision means that Portugal is much more likely to be forced to seek a bailout like those accepted by Greece and Ireland last year, and puts Spain squarely into the crosshairs of nervous investors concerned about which European nation might be next.

Mr Socrates followed through on a pledge that he would resign if the measures were not approved, saying the opposition parties "took away the government's ability to continue running the country.

"As a consequence, I have tendered my resignation," Mr Socrates said in an announcement carried live on television.

In keeping with Portugal's constitution, Mr Socrates formally submitted his resignation to Portugal's president, a ceremonial figurehead who has no executive powers.

The prime minister's resignation ended the centre-left Socialist government's six-year period in power.

Mr Socrates' latest austerity package was its fourth set of measures introduced over 11 months as Portugal scrambled to avoid the embarrassment and financial consequences of asking for outside help to prop up its shaky economy.

The nation has already introduced tax hikes and pay cuts that have angered trade unions and prompted a wave of successive street demonstrations and strikes.

Portugal's problems could hurt efforts by European leaders seeking to prop up confidence for the eurozone itself, and could prompt more market turbulence for the bloc, dooming Lisbon to accepting outside financial assistance.

Many investors believe Spain, the zone's fourth largest economy, is simply too big to bail out.

European leaders hope to soothe nervous international investors at a two-day summit in Brussels starting today, but they will also be dealing with political uprisings in the Arab world, and the fallout Japan's nuclear crisis.

Mr Socrates, who will preside over a caretaker Portugal government until elections are called, is scheduled to attend the meeting.

Mr Socrates said that his failure to push through his austerity measures came "at the worst possible time - ahead of a summit that's decisive for Portugal and decisive for Europe too".

He also said the rejection of his plan increased the probability of Portugal asking for outside help which would entail "much tougher measures" than those he proposed - moves that already won the backing of European leaders.

Foreign financial assistance comes with strings attached, including a role for the International Monetary Fund, which strips away government control of key fiscal policies for years, making it a last resort for cash-strapped countries.

Mr Socrates said his government had done all it could to avert a bailout "so we wouldn't end up in a situation like Greece or Ireland" where fiscal measures imposed by the bailout terms have squeezed the finances of families and companies.

A bailout would be "deeply negative for the image, prestige and reputation of the country", Mr Socrates said.

Debt woes, and differences over how to tackle them, also brought down Ireland's government earlier this year after it accepted a bailout, forcing an election that was won by the main opposition party.

The government's downfall set Portugal, a country of 10.6 million people, adrift just as it is trying to restore its fiscal health.

Portuguese President Anibal Cavaco Silva said after Mr Socrates' announcement that he will meet with all political parties tomorrow to decide the way forward, but the election of a new government puts Portugal into at least two months of political paralysis and limbo because elections will not happen under law until May or June.

Opposition parties said the government's latest plan went too far because it would hurt Portugal's most vulnerable citizens, including retired people who would face increased taxes.