Popular anger over economic austerity measures in Greece exploded on to the streets as striking workers brought the debt-stricken country to a halt and militant seamen stopped holidaymakers from boarding island ferries.

The stand-off, which saw thousands of bewildered tourists being stranded at the port of Piraeus, follows mounting tension between unions and George Papandreou's socialist government. In an electric atmosphere, about 20,000 protesters marched through the capital to denounce the IMF-sponsored fiscal programme Papandreou has vowed to enact in exchange for €110bn (£89bn) of emergency loans, the biggest bailout in history. Athens' debt exceeds €310bn, by far the largest in the European Union.

"Capitalists, not workers, should pay for the crisis," the demonstrators chanted as riot police clashed with a minority of self-styled anarchists also attending the rally. "IMF – get out of Greece."

The protests, which despite a lower than usual turnout attributed by unionists to the summer heat, came as parliament prepared to debate legislation outlining radical reforms to the pension system. The shake-up, which also overhauls labour laws long blamed for the country's lack of competitiveness, will cut pensions, raise the retirement age and enable companies to dismiss employees with greater ease.

Lavish pensions, more than anything else, are thought to have contributed to the drain on public finances. Greek pensioners on average retire on 96% of the salary earned while they were employed, more than twice that enjoyed by Germans now bankrolling the rescue package, according to the Organisation for Economic Co-operation and Development (OECD). "Greece," said Miranda Xafa, a former director at the IMF, "is a classic case of entitlements granted by short-sighted governments that didn't bother to secure financing sources."

Without radical redress, experts believe the country's pension system will collapse in under 15 years. But the reforms, which follow drastic cuts to public sector wages, tax rises and an increase in VAT from 19 to 23%, have also ignited controversy and the fiercest opposition yet. Greeks contend the legislation will dismantle the social welfare system.

Anger is such that senior members of the ruling Pasok party have signalled that they may reject the legislation when it is put to vote in Athens' parliament next week. Papandreou, who was forced to expel three MPs when they refused to endorse the IMF-EU austerity measures, now commands 157 seats out of 300 in the house.