Socrates said that speculation about a bailout was harming Portugal [EPA]

Portugal has insisted that it will not need a bailout from the European Union and International Monetary Fund to tackle its debt crisis, despite its central bank forecasting that the economy is set to plunge into recession.

"All the rumours on the IMF and on external assistance are speculation which does not help which harms the interests of the country and aggravates market conditions," Jose Socrates, the prime minister, said on saturday.

Socrates said Portugal's public deficit for 2010 was "clearly less than the forecast" of 7.3 per cent of output and might even be down by an extra 0.5 percentage points.

However, specualtion that Portugal's eurozone partners have been encouraging it to accept funds to avert a wider crisis that could drag down others, including neighbour Spain, will not go away.

Fernando Teixeira, the finance minister, had earlier been forced to deny that Portugal intended to seek external help and said it "would do everything to avert such an eventuality".

"Portugal is doing its work to solve its fiscal imbalances, it is Europe which seems not to be doing its work in maintaining the stability of the euro," he said.

Confused situation

The European Commission, France and Germany have denied that Lisbon is being pushed towards a bailout, but European officials issued similar denials of pending aid late last year before Ireland ultimately succumbed to pressure to accept a bailout from the EU and IMF.

The situation was similarly confused before Greece asked for help in May.

Lisbon faces a crucial test on Wednesday of its ability to fund itself on the market at affordable rates as it holds a bond auction of $967 million to $1.6 billion worth of long-term debt.

"If it can shift the whole lot at sensible rates it could win a stay of execution on the rescue," Moneycorp analysts said in a client note.

The yield or rate of return on on Portuguese benchmark 10-year bonds fell back to 6.889 per cent on Tuesday, after hitting record high levels of 7.193 per cent on Friday, as tensions eased following Tokyo's expression of support for the eurozone.

The Bank of Portugal forecast that the country's economy would shrink by 1.3 per cent this year, contradicting government forecasts, and said Portuguese banks would continue to rely on European Central Bank for liquidity.