BRUSSELS, March 23: With the government in struggling Portugal on the verge of collapse, European leaders faced an uphill task on Wednesday to agree on the stronger defences needed to resolve a threatening debt crisis.

Leaders from the 27 European Union states lock horns on Thursday and Friday in Brussels on how to best remedy a crisis, which has jeopardised the future of the whole euro project and claimed Greece and Ireland as victims last year.

The debt crisis will consume most of their energies, with leaders supposed to come up with a definitive, comprehensive action plan just at the moment when the Portuguese government looks likely to fall, forcing Lisbon into seeking a major bailout.

Economists increasingly expect Lisbon to have to call for emergency loans.

Portugal's parliament was set on Wednesday to reject Prime Minister Jose Socrates' latest austerity plan, aimed at squeezing its public deficit to 4.6 per cent of GDP this year.

The Socialist leader has said he will resign in that event.

“The truth is that political instability in the run-up to elections would weaken the position of the (country), also against impending rating assessments -- thus strengthening the case for Portugal to ask for external aid,” said Tullia Bucco, a Milan-based economist with UniCredit.

The last Moody's downgrade heaped the pressure on Lisbon, forcing it to pay ever higher rates of return to raise fresh funds to cover maturing debt.

The benchmark Portuguese 10-year bond yield hit 7.464 per cent just before 14:00 GMT, an unsustainable level for the long term.

Lisbon must repay nine billion euros ($12.9 billion) of debt by June 15.

A Portugal bailout would come at the worst possible time, not least because it would have to be sourced from an emergency fund, the temporary European Financial Stability Facility, worth 440 billion euros.

Diplomats told AFP that Finland has excluded any increase in EFSF guarantees on Friday before its April 17 elections.

Already tapped by Ireland, the amount the fund can actually lend today, allowing for a required buffer, is about 200 billion euros.

If Portugal sounded the alarm, the margin for other weak eurozone states such as Spain would narrow, forcing up their borrowing costs and making the whole debt issue much more difficult to resolve.

The summit is supposed to agree on the European Stability Mechanism which will to replace the EFSF in 2013, with leaders to endorse an EU treaty change enabling its ESM creation.

If that can be achieved, battles still rage elsewhere. —AFP