By Andrei Khalip
LISBON (Reuters) - In an about-face, Portugal's government has agreed to negotiate alternative solutions to a social security tax hike that sparked the worst backlash to austerity since last year's EU/IMF bailout, an official statement said on Saturday.
After an eight-hour meeting of the presidential state council that was besieged by protesters and ended long after midnight on Saturday, the council said the negotiations would now proceed between the government, unions and employers.
On Friday, Prime Minister Pedro Passos Coelho promised to "listen to the country" after huge street protests last weekend and criticism of the plan by unions and business leaders alike. He had previously only agreed to "calibrate" the measure.
The plan to raise the contributions in 2013 to 18 percent form 11 percent has undermined a reluctant acceptance of austerity in Portugal, increasing pressure on the government as it strives to meet the strict conditions of the bailout.
"The council was informed of the government's readiness to study, within the framework of the social bargaining process, alternatives to changes in the social security rate," the statement said after the council meeting.
* It also said that "difficulties that could affect the solidity of the ruling coalition have been overcome", confirming earlier statements by the two centre-right coalition partners that they remained committed to the bailout's targets. Junior coalition partner CDS-PP is traditionally against tax hikes.
Thousands of protesters gathered next to the presidential palace where President Anibal Cavaco Silva's met with his council -- the consultative body made up of senior political figures, including Prime Minister Pedro Passos Coelho.
They demanded the government's resignation and chanted: "Thieves, thieves!". Over a hundred stayed until the end of the meeting and booed the council members as they left.
Expresso weekly newspaper said in its weekend edition the premier had decided to abandon the measure, which had irritated workers because it simultaneously reduced social security contributions by companies, but was preparing a new cut in holiday subsidies for workers instead to meet tough fiscal goals of the bailout.
Some analysts say the badly-devised attempt to hike the social security levy will make additional austerity measures harder to swallow now despite the government's retreat and strife is likely to grow especially since Portugal's economic recession is now expected to continue next year.
Portugal has entered its worst recession since the 1970s as it labours under sweeping tax increases and spending cuts, with the centre-right government's popularity slumping to an all-time low after it announced the tax changes.
(Editing by Carol Bishopric)