Confronted in parliament by opposition deputies, who said the government should ease the austerity drive to spare the economy, Passos Coelho said meeting the bailout goals was the only path for his government.

"At a time when Greece repeatedly cannot fulfill what was agreed, you want the government to send a signal to the markets, to Portuguese, to Europe, to the IMF that we want to renegotiate our treaty instead of fulfilling it? ... If we fulfill the terms, it is Portuguese who win," Passos Coelho told parliament.

The head of the IMF mission to Portugal, Poul Thomsen, said last month the country's tough fiscal goals may have to be relaxed if economic conditions in Europe worsen, but Passos Coelho appeared determined to stick to the original terms.

"This is going to be a year of great challenges, but it will also be ... a year of turnaround in which we will show that we meet our obligations. Our sacrifices will bring about stabilization of investor confidence and create healthy conditions for future growth," the premier said.

He reiterated that last year's deficit would be way below the bailout target of 5.9 percent of gross domestic product (GDP), falling to around 4 percent from 9.8 percent in 2010, but that was achieved largely thanks to a one-off transfer of some 6 billion euros in banks' pension fund money to state coffers.

This year's deficit target is 4.5 percent, while next year Portugal has to cut the gap to no more than 3 percent.

Since the European Union and IMF insist that such one-off measures should no longer be used in the future, Portugal's austerity efforts had to be reinforced for 2012, involving pay cuts in the public sector and additional tax hikes.

Spending cuts and tax hikes are already hammering Portugal's

weak economy, which is facing its worst recession since the chaotic return of democracy in 1974.

GDP is expected to have contracted 1.6 percent last year and the government forecasts a much steeper fall of 3 percent this year, before modest growth returns in 2013.

(Reporting By Andrei Khalip and Daniel Alvarenga; Editing by Ruth Pitchford)