The multi-layered effort to stave off a Greek sovereign default that could plunge Europe into one of its worst ever crises moved towards a climax last night with the Greek prime minister pleading in Athens for a vote of confidence and Europe's leaders staring into the abyss before a Brussels summit on Thursday.

Leaders in Brussels spoke of the worst crisis in Europe since the second world war as the International Monetary Fund (IMF) set ultimatums before the 17 countries of the euro single currency and international ratings agencies classified the bailout terms for Greece as a likely default.

George Papandreou, the embattled Greek prime minister, needed to win a midnight vote of confidence in his reshuffled socialist government before attempting an even bigger challenge – getting the parliament in Athens to back a radical programme of spending cuts, tax increases, and a mass assets sell-off by the end of the month.

As Athens's 300-seat parliament prepared for the vote, tens of thousands of protesters converged on Syntagma Square in a mass show of "no confidence" for politicians widely perceived to have triggered the financial mess in which the nation now finds itself.

"As long as there are squares to protest in we will be there," said Giorgos Papastathopoulos, an unemployed civil engineer gesticulating angrily towards the parliament building. "These people are thieves, they are crooks; if they were really honourable they would lead by example and take a wage cut just like everyone else before talking about austerity."

If Greece fails to agree the austerity measures, the IMF will pull the plug on the latest €12bn tranche of its €110bn bailout and Greece would be insolvent, with immense implications for European banks and the fate of the single currency.

However, the strong expectation that Papandreou would win the vote lifted stock markets all over the world. The FTSE 100 in London closed 81.92 points higher at 5775.31 and the FTSEurofirst 300 index of leading shares rose 1.5%, its biggest increase for two months. The Dow Jones industrial average was up more than 100 points at lunchtime in New York.

At a summit in Brussels on Thursday evening, EU governments will be under intense pressure to seal a new three-year Greek bailout worth as much as the current rescue fund. The expectation was that leaders would agree to guarantee the new bailout, leaving the details to be hammered out by 3 July.

"We're at a critical point in the most serious crisis since the second world war," warned Olli Rehn, the European commissioner for monetary affairs.

A group of 15 leading public figures, including six former EU prime ministers, warned that the EU faced a future on the international sidelines.

"Europe isn't in a good place these days," said the group, all allied with the Brussels Friends of Europe thinktank. "The drive towards closer integration is losing momentum and appears in great danger of slipping backwards … European leaders risk the EU becoming a marginal player in a globalised world whose rapid change is clearly not to Europe's advantage."

Chancellor Angela Merkel of Germany, a central figure in the crisis, voiced confidence that Europe would rise to the challenge, while reiterating German demands that Greece's private creditors should volunteer to roll over the debt as part of the rescue. "We believe some burdens can be put not only on taxpayers but that banks must also participate," Merkel said while visiting Warsaw.

"We will achieve positive results because it is in the interests of banks and of countries for the euro currency to be stable … These three components – Greece's tasks, EU solidarity and the voluntary participation of banks – are the solution."

But Fitch, one of the three big international ratings agencies, cast doubt on Merkel's optimism, warning that it would view a voluntary rollover of Greek debt as a default. "Fitch would regard such a debt exchange or voluntary debt rollover as a default event and would lead to the assignment of a default rating to Greece," said Andrew Colquhoun, head of Asia-Pacific sovereign ratings with Fitch.

The jury still seems to be out on this, however, with detailed arguments raging across the EU over how, when, and whether Greece would be deemed to be in default. The process of persuading the banks, insurance companies and pension funds holding Greek debt to remain exposed after redeeming their loans is also an exacting task which could take weeks without any certainty of success.

The markets and the European business elite believe that in the end Greece will need to restructure its unmanageable debt with major writedowns for its creditors. A poll of German executives showed very few of them believed Greece could avoid a debt restructuring. Almost nine out of 10 of the 519 business people questioned in the poll for the business magazine, Capital, predicted a restructuring, while two-thirds were worried about the stability of the euro.

EU leaders appeared to be playing for time to try to avoid colossal collateral damage across the eurozone, while the IMF was urging the EU to get its act together and guarantee a copper-bottomed bailout for Greece before the fund would commit to contributing.

The IMF has taken a harder line on the European debt crisis in recent weeks since the resignation of its French chief, Dominique Strauss-Kahn. Some European officials are also complaining that the temporary leadership of the IMF is inhibiting its capacity to act.