Portugal given lifeline ahead of 'Battle of Spain'

But analysts said that in the euro zone's simmering debt crisis, the ‘Battle of Spain’ would likely prove decisive in 2011.

According to senior eurozone source, Germany, France and other eurozone countries were pushing Portugal to seek an EU-IMF assistance programme, following Greece and Ireland, to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.

But German Chancellor Angela Merkel, speaking in Malta, denied that any pressure was being applied. “We have never, and we shall never urge countries or exert pressures on them to make certain steps.”

“We offered the facilities to help these countries, if such help is necessary but each and every country is free in its decision to take recourse or not,” she maintained.

The source was reported as saying that Lisbon would need between €50 billion and €100 billion in loans, similar to Ireland, which accepted an €80 billion EU-IMF rescue in December after a banking crisis caused by a burst real-estate bubble lumbered the state with huge liabilities.

Portuguese Prime Minister José Sócrates, who is stubbornly holding out against a bailout, said last Friday his country had no need of outside assistance because it was ahead of schedule in reducing its budget deficit.

Socrates, who heads a minority socialist government, is mindful of the traumatic history of Portugal's two International Monetary Fund rescues since its return to democracy in 1974.

The memory of the IMF's involvement, in 1977 and in 1983, is so etched on the Portuguese psyche that the country's media is not even mentioning that it would primarily be the European Union that would finance any bailout this time.

German Finance Minister Wolfgang Schaeuble joined Merkel in denying that Berlin was pushing anyone to seek assistance, but he did say it was defending the euro. A French government official also said it was nonsense to suggest that Paris and Berlin were pressuring Lisbon.

But economists and market analysts believe it is only a matter of time before deficit-laden Portugal, whose stagnant economy has lost competitiveness since joining the euro zone, has to seek aid.