Greece's parliament was expected to defy angry protesters on the streets of Athens and endorse a deeply unpopular package of savage austerity measures in order to try to avoid a sovereign default and retain the euro as its currency.

With eurozone leaders declaring it was time for Greece to put up or shut up and that Athens' promises could no longer be believed, Greece's two main political parties and the caretaker prime minister invoked apocalyptic scenarios for the country if the €3.3bn (£2.76bn) of cuts ordained by the eurozone were not supported.

Street battles between police firing rounds of tear gas and demonstrators hurling firebombs and marble slabs left Syntagma Square, the plaza in front of the parliament building, resembling a war zone. Rubbish bins burned as plumes of smoke and choking clouds of toxic chemicals filled the air.

Bangs could be heard inside parliament and the tear gas drifting across the square reached the debating chamber. Last night several buildings had been set on fire, including a cinema, bank and a number of shops, and Greek television reported that dozens of citizens and at least 40 police officers had been injured.

Under a sea of banners denouncing further wage, pension and job cuts, tens of thousands of protesters chanted against "the occupation" of the country by foreign lenders keeping Greece afloat.

"The rebellion has begun," the veteran leftist Manolis Glezos told TV reporters. "These measures will never pass. They are a breach of our democracy," he spluttered, holding a surgical mask to his face against the fumes.

The prime minister, Lucas Papademos, warned ahead of the vote that wages and pensions would go unpaid, hospitals and schools would be devoid of funding, banks would collapse and people's savings would be lost if the 300 MPs rejected the terms set by the eurozone for receipt of a €130bn bailout.

Without the bailout – the second in two years – bankrupt Greece will be insolvent and have to default on its debt next month when it needs to redeem €14.5bn of loans.

"A disorderly default would throw the country into a disastrous adventure. It would create conditions of uncontrollable economic chaos and social eruption," Papademos said in a television address.

Despite six government resignations in recent days and the departure of the small extremist Laos party from the caretaker coalition, the two main parties – the Pasok socialists and the centre-right New Democracy – can muster a comfortable majority, although analysts predicted dozens of defections to the rejectionist camp. But in fiery exchanges in the chamber, the finance minister, Evangelos Venizelos, warned: "If the law is not passed, the country will go bankrupt."

George Papandreou, the former socialist prime minister felled by the crisis last year, declared that Greece was at war and that it had to win. Antonis Samaras, the centre-right leader tipped to be prime minister after elections expected in April, also sought to rally his MPs behind accepting the deal after rejecting key details of the cuts for weeks.

With trust between Athens and its eurozone creditors, led by Germany, at an all-time low, the Greek government was told the time for pledges had run out.

"Greece's promises are no longer enough for us," said Wolfgang Schäuble, Germany's finance minister, who also spoke of the possibility of Greece leaving the euro.

"The Greeks have not quite managed to form a government supported properly by all the parties and therefore have not been able to tackle the necessary reforms as decisively as we would all like," said Schäuble.

While eurozone finance ministers are expected to agree to the €130bn bailout on Wednesday provided Greece meets its end of the bargain, Berlin is insisting that most of the money does not actually go to Greece but is held in a separate account and is used purely to service the country's debt.

EU ministerial sources said that account could hold up to 70% of the bailout funds. Such a move would be unprecedented and is likely to be contested. But the German proposal is also supported by France. By guaranteeing that Greece's creditors are repaid, there would be no default.

As part of the €3.3bn in savings ordered by the eurozone, the Greeks have to specify how a €325m overspend will be resolved. While the parliament was due to vote through the measures, it remained unclear where these extra savings were coming from.

A particularly neuralgic point in the savings has been the requirement to slash the minimum wage by 22%. "It's a big problem in Greece that the minimum wage is so high," said Schauble. "That's why there are so many black [illegal] workers. That wouldn't happen if they had a functioning administration."

As Greece's MPs prepared to vote on the austerity package, thousands of protesters remained on the streets of Athens denouncing the Germans and the EU. The demonstrations against austerity also spread to Portugal, the second of three eurozone countries trading hairshirt economics for a eurozone bailout, where tens of thousands came out in protest against collapsing living standards.