By Shrikesh Laxmidas and Axel Bugge
LISBON (Reuters) - The opposition Socialists demanded a renegotiation of Portugal's bailout terms on Friday, raising a hurdle to a cross-party pact the president says is needed to end the euro zone country's dependence on international funding next year.
Prime Minister Pedro Passos Coelho and Socialist leader Antonio Jose Seguro said they are ready to discuss a deal, but analysts say their divergence on painful austerity policies linked to the bailout could make it hard to resolve the crisis.
"We have to abandon austerity politics. We have to renegotiate the terms of our adjustment program," Seguro told parliament. "The prime minister has to recognize publicly that his austerity policies have failed."
The political turmoil has already forced Lisbon to request a delay in the eighth review of the bailout by its creditors, initially due to start on Monday, until the end of August or early September.
The delay drove up yields on Portuguese government bonds, which move inversely with prices, with 10-year yields surging 90 basis points on Friday to 7.87 percent.
President Anibal Cavaco Silva threw the country into disarray this week by rejecting the premier's bid to heal a rift in the ruling coalition via a cabinet reshuffle, calling for a cross-party agreement to last until the end of the bailout program in June 2014, to be followed by early elections.
The Socialists have blamed the government's austerity drive under the 78-billion-euro bailout for pushing Portugal into its biggest economic slump since the 1970s and unemployment to record levels of around 18 percent.
AGREEMENT SEEN DIFFICULT
"More time is something which we have always fought for. More time so our adjustment curve is not so steep and we can relieve sacrifices families and businesses have to make," Seguro, whose party lead in opinion polls, said.
The Socialists had lobbied Cavaco Silva to call a snap election immediately, a move which the president rejected, saying it would significantly increase the risk of Portugal being forced to request a second bailout.
"As things stand today, I don't think there is any possibility of the Socialists reaching a deal with the coalition without any concessions from the government as they will not back the continuation of policies which they reject," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto.
"There have to be concessions, especially as the Socialists prefer a (snap) election to an agreement," he added.
The resignation of Foreign Minister Paulo Portas, who also leads the junior coalition partner CDS-PP, over Passos Coelho's austerity policies last week triggered the crisis.
The premier said his government was still in office with full powers and the country could overcome the crisis under the president's plan. Political talks to resolve the situation are set to continue in coming days.
"What happened should not have happened, and we have to show that it will not happen again," Passos Coelho told lawmakers.
The small opposition Green Party said it would present a motion of no confidence to parliament. The motion, expected next week, is unlikely to succeed but with political events moving quickly it will be watched closely.
Portugal's debt agency said earlier on Friday it would only return to regular bond issuance in the second half of 2013 "if market conditions are conducive".
Analysts said that even if parties reach a deal, Portugal's reform progress could suffer.
"Under the president's plan, Mr Passos Coelho would be politically crippled," Nicholas Spiro, Managing Director at Spiro Sovereign Strategy in London, said in a research note.
"The Socialists would rapidly lose support and the reform drive would grind to a screeching halt."
(Additional reporting by Sergio Goncalves and Patricia Rua, editing by Axel Bugge and Philippa Fletcher)
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