Senior banker Lucas Papademos was named Thursday to be the new prime minister of an interim Greek unity government that seeks to cement a new European debt deal and stave off national bankruptcy.

Papademos, who was named after four tortuous days of power-sharing talks, immediately called for unity and promised to seek cross-party co-operation to keep Greece firmly in the 17-nation eurozone.

The 64-year-old former vice-president of the European Central Bank was chosen to lead a temporary government backed by both the governing Socialists and opposition conservatives that will operate until early elections, tentatively set for February. He replaces outgoing Prime Minister George Papandreou midway through the Socialist leader's four-year term.

"I am not a politician but I have dedicated most of my professional life to exercising financial policy both in Greece and in Europe," Papademos said after the Greek president gave him the mandate to form a Cabinet. "The Greek economy continues to face huge problems despite the great efforts than have been made for fiscal reform."

He insisted Greece must defend its euro membership.

"The participation of our country in the eurozone is a guarantee for the country's monetary stability. It is a driver of financial prosperity," Papademos said. "And our country's participation in the the eurozone, despite the difficulties that arise, will facilitate the adjustment of the economy and its development."

The new cabinet, whose members were not immediately named, will be sworn in Friday afternoon.

Shares on the Athens Stock Exchange were up 1.6 per cent at 779.6 on the news of the power deal. That came despite more bad news for Greece's recession-hit economy: unemployment surged to 18.4 per cent in August, up from 12.2 for that month in 2010.

The markets have been clamouring for Greece to end its political deadlock so it can avoid an imminent bankruptcy that could push Europe into a new recession and world financial markets into turmoil.

European officials greeted the news with relief.

"The agreement to form a government of national unity opens a new chapter for Greece," said a joint statement issued by European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy. "We warmly welcome this news."

Many Greeks are deeply angry after 20 months of government austerity measures, including repeated salary and pension cuts and tax hikes taken to meet the conditions of the country's first, €110 billion ($152 billion) international bailout. Despite the reforms, the government has missed its financial targets as Greece fell into a deep recession. Furious labour unions have organized repeated strikes, and Athens' frequent demonstrations have degenerated into riots.

The European Union, meanwhile warned that the 17-nation eurozone could slip back into "a deep and prolonged" recession next year as the debt crisis spins out of control. The European Commission predicted the eurozone will grow a paltry 0.5 per cent in 2012 — way less than its earlier forecast of 1.8 per cent growth. EU unemployment will be stuck at 9.5 per cent for the foreseeable future.

Papademos' appointment comes after nearly two weeks of political turmoil sparked by Papandreou's surprise announcement that he wanted to put his country's new €130 billion ($177 billion) European debt deal to a referendum. Under it, private bondholders forgive 50 per cent of their Greek debt holdings so the country can get its massive debts under control and start to pay its own way.

Papandreou's sudden decision on a popular vote led to mayhem on international markets and angered both European leaders and many of his own Socialist lawmakers. European officials said the call had endangered Greece's position in the eurozone, and are withholding the next, critical €8 billion ($11 billion) bailout payment until Athens approves the second debt deal.

Outgoing Prime Minister George Papandreou waves to the media as he leaves the presidential palace in Athens on Thursday. (Thanassis Stavrakis/Associated Press)

Bowing to pressure, Papandreou agreed to resign and reached a historic power-sharing deal with conservative opposition leader Antonis Samaras on Sunday to form a transition government.

Papademos, who is not a member of any party, has been operating lately as an adviser to the prime minister.

He taught at Columbia University from 1975 to 1984 and worked at the Federal Reserve Bank of Boston before returning to Greece to become chief economist at the Bank of Greece from 1985-1993.

He was then appointed deputy governor of the Bank of Greece, rising to the helm a year later after helping fend off a speculative attack on the drachma.

As governor from 1994 to 2002, Papademos presided over an era of increasing independence from the government that was crucial in helping Greece secure membership in the eurozone. He then spent eight years at the European Central Bank.

The political chaos in Athens had taken a back seat this week to developments in Italy, where Premier Silvio Berlusconi announced his intention to resign soon after a new package of economic reforms was passed.

But concerns over a prolonged political gridlock in the eurozone's third-largest economy — Italy is considered too big for Europe to bail out — roiled the markets. Italy's borrowing costs shot up Wednesday, tempered only slightly by a hasty promise from Italy's president that Berlusconi would be out of office likely by Saturday.

Respected Italian economist Mario Monti was then named a senator for life, which puts him in line to run the next government. Monti, 68, now heads Milan's Bocconi University but made his reputation as the European Union competition commissioner who blocked General Electric's takeover of Honeywell.

Europe has already bailed out Greece, Portugal and Ireland — but together they make up only about 6 per cent of the eurozone's economic output, in contrast to Italy's 17 per cent.

Keeping in mind that some Greek bond holders will lose 50 per cent of their holdings, many analysts fear those holding Italian bonds could one day also be required to forgive some of Italy's massive €1.9 trillion ($2.6 trillion) debt.