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Senior EU finance officials gathered in Vienna to prepare the ground for more high-level talks on the Greek debt crisis. Sources said a range of policy steps were on the table, including a "Vienna Initiative"-style debt rollover and bond maturity extensions.

Greece faces a funding gap of over 60 billion euros in 2012 and 2013. Any private sector involvement is likely to form part of a broader package of measures to fill that hole, including aggressive privatisations, fresh austerity pledges from Athens and new aid from the European Union and the IMF.

Ratings agency Fitch said in a report on Tuesday that Greece's official lenders needed to put up 90-100 billion euros to give it sufficient time to implement reforms and cut debt.

It said Greece's ability to deliver on its fiscal promises in the face of rising opposition from the public and political opposition was "increasingly in doubt.

Underscoring the domestic obstacles, Greece's conservative opposition said a deal between the government and visiting European and IMF inspectors to cut value-added taxes in a bid to win their support was "not good enough.

Greece's conservative opposition have demanded lower taxes as a condition for reaching a consensus with the Socialist government on further austerity measures, which Brussels says is essential to secure any further assistance.

The euro rose above $1.44 to reach its highest level in over two weeks on growing confidence that a deal for Greece would be sealed, before dipping slightly on reports that Germany and other countries were sticking to their insistence on private sector involvement.

Markets have grown increasingly skeptical in recent weeks about the ability of policymakers to solve Greece's debt woes because of rising reluctance from countries like Germany, Finland and the Netherlands to provide more aid, as well as new demands by the IMF that Europe commit to long-term guarantees for Greece before it releases more funds.

Late on Monday, however, the chairman of euro zone finance ministers, Jean-Claude Juncker, expressed optimism that a new package was coming together.

"A LA CARTE"

Two European sources involved in the negotiations said the Economic and Financial Committee (EFC) of senior EU finance ministry officials was meeting in Vienna on Tuesday to thrash out options for private sector involvement in a new Greek deal.

They stressed the meeting was preparing the ingredients for a political decision -- a sort of "a la carte menu," where ministers would remain free to choose only dishes they liked.

A summit of EU leaders, preceded by a meeting of euro zone finance ministers, are scheduled for late June.

The range of options under discussion were loosely based on the January 2009 Vienna Initiative on financial stability in central and eastern Europe, agreed by international financial institutions, the European Commission and ECB, key EU governments and commercial bankers.

Under that pact, the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development all agreed to boost credit to the region, the EU agreed to double its balance-of-payments facility for non-euro zone member states, and crucially the main commercial banks agreed to maintain their CEE exposure and roll over credit lines.

The Vienna Initiative was widely credited with preventing a financial meltdown around the region after Hungary took an IMF-led bailout, at a time when western banks faced pressure to repatriate capital to cover losses incurred in the wake of the sub-prime crisis and the collapse of Lehman Brothers.

"There might be a component of a Vienna Initiative type," one source involved in the EFC talks said. "There is no agreed definition yet of what that would mean, but there is discussion of what it would take."

PRIVATE SECTOR OPTIONS

The second source said the options included a voluntary agreement by banks to maintain their exposure to Greece for the duration of a new three-year adjustment program, to extend the maturities of existing bonds or roll over maturing debt.

The source suggested the ECB could live with such a "voluntary" involvement of the private sector without refusing Greek bonds as collateral, but said it was only likely to give its assent at the last minute having seen the entire package.

Greece took a 110 billion euro ($158 billion) rescue package from the EU and IMF last May, but has struggled to meet most of the fiscal goals set out for it as part of that deal.

With a debt mountain of nearly 330 billion euros at the end of last year, many economists believe it will be difficult for it to avoid a restructuring at some point in the future.

But the ECB has warned against any form of restructuring, a message reinforced by Executive Board Member Gertrude Tumpel-Gugerell on Tuesday.

Inspectors from the so-called "troika" are in Athens to decide whether to release a tranche of 12 billion euros that Athens needs next month to avoid an immediate default. In part due to IMF demands, discussions on a new package that would meet Greece's needs through 2014 are taking place in the background.

EU officials said that package, expected to total around 65 billion euros, could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatization program.

(Writing by Noah Barkin, editing by Mike Peacock)

When the fund, controlled by Col. Muammar Gaddafi, made huge losses Goldman offered Libya the chance to become one of its biggest shareholders, the Journal said, citing people familiar with the matter.

Goldman Sachs was not available for comment, outside of normal U.S. business hours.

Among the different proposals put forward by Goldman Sachs to recoup the losses was one in which Libya would get $5 billion in preferred Goldman shares in return for investing $3.7 billion into the securities firm, the paper added.

The documents also show that company Chief Executive Lloyd Blankfein, its finance chief David Viniar and top executive Michael Sherwood were involved in discussions in this regard, the Journal reported.

The Libyan fund had apparently paid $1.3 billion for options on a basket of currencies and on six stocks - Citigroup Inc (C.N), Italian bank UniCredit SpA (CRDI.MI), Spanish bank Banco Santander, German insurance giant Allianz (ALVG.DE), French energy company Électricité de France (EDF.PA) and Italian energy company Eni SpA (ENI.MI), the paper said.

(Reporting by Rachel Chitra in Bangalore; Editing by David Cowell)

(This story was corrected in paragraph two to change the spelling of Muammar Gaddafi)

Even as the upbeat outlook spurred some talk of a possible "V shaped" recovery for the world's third-largest economy and room for the central bank to hold off with any more policy easing, rating agency Moody's Investors Service flagged its concerns over the weak policy response to the crisis.

Moody's moved one step closer to downgrading the country's debt ratings, putting it on review for a possible downgrade and highlighting its concerns over the policy response to "faltering economic growth prospects."

Data on Tuesday showed output rose 1.0 percent in April, short of economists' median 2.8 percent forecast, but firms' plans for the following two months suggested a brisk recovery from a record 15.5 percent slump in the immediate aftermath of the March 11 disaster.

Manufacturers predicted an 8.0 percent rise in their May output and a similar 7.7 percent increase in June, Ministry of Economy, Trade and Industry data showed on Tuesday.

However, optimism about longer-term outlook was tempered by lingering fears of power outages during the summer peak period and concerns that political infighting may delay reconstruction spending.

"From May a V-shaped recovery may start and it (output) may keep rising through July and August at a similar pace to what is forecast for May and June," said Kyohei Morita, chief economist at Barclays Capital Japan.

He said reduced electricity supplies might dampen output in July-September, but the economy should regain steam later on, provided that extra reconstruction spending kicks in by then.

"One risk is what politicians do in June. If they end up holding a snap election, that will delay the second extra budget," Morita said.

Prime Minister Naoto Kan faces a no-confidence vote as soon as this week and even though most political analysts think Kan will survive, the looming face-off bodes ill for cooperation with opposition needed to get spending through a divided parliament.

The 9.0 magnitude quake and a deadly tsunami that lashed Japan's northeast left around 24,000 dead or presumed dead and triggered the world's worst nuclear crisis in 25 years, knocking Japan back into a second recession in less than three years.

The immediate blow from the disaster proved more violent than many had initially thought, shaving 0.9 percent off the first-quarter economic output.

Most economists expect the economy to shrink further in the second quarter before gradually starting to recover some time in the second half of the year with the help of Japan's biggest reconstruction effort since the post-World War Two era.

The Bank of Japan eased monetary policy just days after the March earthquake, but it has stood pat on policy since then on the view that the economy will resume a moderate recovery before the end of the year. It has signaled, however, that it stands ready to loosen policy further if the damage from the quake proves bigger than expected.

The latest data and news from individual companies, however suggested manufacturers were making good progress in restoring supply networks torn apart by the disaster and managing their energy needs in the face of possible electricity shortages.

A separate private Purchasing Managers' survey for May confirmed the improving outlook with manufacturing activity rebounding from a two-year low and expanding for the first time in three months this month.

Economists pointed to a still subdued consumer demand as another reason for caution about the economy's longer-term prospects.

Underscoring lingering weakness in consumption, household spending fell 3.0 percent in April from a year earlier, after a record 8.5 percent annual drop seen the previous month and against a median forecast for a 2.9 percent annual decline, government data showed. Separate data showed wage earnings fell in the year to April 1.4 percent, the sharpest decline since 2009.

The jobless rate inched up to 4.7 percent from 4.6 percent seen in March, as expected, while the availability of jobs fell to 0.61 from 0.63 in March, below 0.62 expected by economists, meaning that there were more than three jobs available for every five job seekers.

(Additional reporting by Kaori Kaneko; Writing by Tomasz Janowski; Editing by Edmund Klamann and Vidya Ranganathan)

The euro rose to $1.4354, its highest in three weeks, supported by a Wall Street Journal report that Germany is considering dropping its demand for an early rescheduling of Greek bonds in order to facilitate a new package of aid loans for heavily-indebted Greece.

The European Union wants to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.

"The euro zone problems appear to be subsiding for now. Or putting it another way, the market appears to have stopped looking at them as a factor for now," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ, adding the market could focus on upcoming U.S. data releases. Key numbers including ISM manufacturing and payroll data are due this week.

In Japan, the Nikkei average rose more than 1 percent to 9615.54, boosted by industrial output figures.

Though an output increase of 1 percent in April was below expectations, manufacturers sharply increased their forecasts for May, predicting output will rise 8.0 percent compared with the previous 2.7 percent forecast, data from the Ministry of Economy, Trade and Industry showed.

Companies expect the recovery to continue in June, a sign they are making progress in recovering from the March earthquake.

"Investors got past the weak data in April and cheered the strong outlook by buying futures," said Tsuyoshi Segawa, an equity strategist at Mizuho Securities.

Big gainers on the Nikkei included solar power firms, expected to win business as a result of Germany's decision to shut all its nuclear reactors by 2022, a switch in policy prompted by the Fukushima radiation scare in Japan.

Panel-maker Sharp Corp rose 3.0 percent to 762 yen and panel equipment manufacturer Ulvac surged 2.9 percent to 2,073 yen.

MSCI's index of Asia-Pacific stocks outside Japan was up 1.2 percent.

Brent crude oil for July delivery rose 97 cents to $115.65 a barrel, having slipped below $115 on Monday, when markets were closed in the United States and Britain. Prices are down around 9 percent in May, the biggest drop since May last year.

Gold ticked up to $1,538.80 per ounce by 0209 GMT, after closing at $1,597.95 on Monday in trade drastically thinned by market holidays in the U.S. and Britain.

Gold, one of the chief beneficiaries of worries about the security of currencies and other assets, set a record high of $1,575.79 per ounce in early May.

Greece's conservative opposition meanwhile demanded lower taxes as a condition for reaching a political consensus with the Socialist government on further austerity measures, which Brussels says is needed to secure any further assistance.

Moves to plug a looming funding gap for 2012 and 2013 were accelerated after the International Monetary Fund said last week it would withhold the next tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for next year.

Senior EU officials held unannounced emergency talks with the Greek government over the weekend, an EU source said.

Greece took a 110 billion euros ($158 billion) rescue package from the EU and IMF last May but has since fallen short of its deficit reduction commitments, raising the risk of a default on its 327 billion euro debt -- equivalent to 150 percent of its economic output.

The tax cuts sought by conservative New Democracy leader Antonis Samaras could aggravate the revenue shortfall, but he argues they are essential to revive economic growth.

EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatisation program. "It would require collateral for new loans and EU technical assistance -- EU involvement in the privatisation process," one senior EU official said, speaking on condition of anonymity.

Extra funding for Greece faces fierce political resistance from fiscal conservatives and nationalists in key north European creditor countries -- Germany, the Netherlands and Finland -- complicating EU governments' task.

Greek daily Kathimerini said finance ministers of the 17-nation single currency area may hold a special meeting next Monday on a new package. European Commission spokesman Amadeu Altafaj dismissed the report as "unfounded rumours, once again."

The next scheduled meeting of euro zone finance ministers is on June 20 in Luxembourg, having been pushed back a week from its original date. It will be followed three days later by a summit of EU leaders to assess the 18-month-long debt crisis.

MARKETS RATTLED

Mass unemployment and wage and benefit cuts due to the EU/IMF austerity plan have triggered spontaneous youth protests in Greece as well as a series of one-day strikes by powerful trade unions.

Weekend comments by an Irish minister that Dublin too may need a second rescue package may also fuel opposition to further bailouts among lawmakers in Berlin, the Hague and Helsinki.

Transport Minister Leo Varadkar told The Sunday Times newspaper that Ireland was unlikely to be able to return to capital markets next year as foreseen in its EU/IMF program.

"It would mean a second program (of emergency loans)," he was quoted as saying.

Irish central bank governor Patrick Honohan acknowledged at a news conference on Monday that debt market conditions were worse now than when Ireland took an 85 billion euro bailout last November but said they would improve.

Uncertainty over whether Greece will receive the next 12 billion euro aid tranche required to meet 13.4 billion euros in funding needs in July continued to rattle financial markets.

The Greek 10-year bond spread over safe haven German Bunds rose by 20 basis points to 1,387. Two-year yields were up 58 bps to 26.23 percent.

The European Central Bank maintained a drumbeat of pressure against any attempt by EU politicians to restructure Greece's debt mountain, even by asking investors to accept a voluntary extension of bond maturities.

ECB board member Lorenzo Bini Smaghi said in an interview published on Monday the idea that debt restructuring could be carried out in an orderly way was a "fairytale," saying it was the equivalent of the death penalty.

"If you look at financial markets, every time there is mention of a word like 'restructuring' or 'soft restructuring' they go crazy -- which proves that this could not happen in an orderly way, in this environment at least," Bini Smaghi told the Financial Times.

He also warned against a debt 'reprofiling', or voluntary extension of Greek bond maturities, saying it would be hard to get investors to agree to such a deal without the use of force.

Euro zone governments are actively studying options for changing the maturities on Greek debt, officials say, although German Finance Minister Wolfgang Schaeuble acknowledged in an interview last week that it was very high risk.

"The Eurogroup is doing research for reprofiling -- what can you do on reprofiling? Is it possible without a credit event?" Dutch Finance Minister Jan Kees De Jager told reporters on Saturday in Cyprus. "It's an investigation, and we have to wait for the outcome of it.

EU officials contend that Greece could do much more to help itself by selling off a treasure trove of state assets.

ECB executive board member Juergen Stark told Welt am Sonntag newspaper that Athens could raise as much as 300 billion euros from privatising state property.

Greece currently aims to raise 50 billion euros from privatisations by 2015 to help stave off a fiscal meltdown, but the country lacks a proper land registry and ownership of many potentially lucrative assets is legally uncertain.

Athens is setting up a sovereign wealth fund to pool real estate assets and state stakes in companies such as telecom company OTE, Post Savings Bank and ports.

Top EU officials have asked Greece to step up privatisations urgently and suggested creating a trustee institution to help the process similar to the body that privatised East German firms after the fall of communism.

(Additional reporting by Angeliki Koutantou and Ingrid Melander in Athens, Marius Zaharia in London, Luke Baker in Brussels; writing by Paul Taylor, editing by Mike Peacock)