FRANKFURT (Bloomberg) - European Central Bank President Jean-Claude Trichet said any aid package to Greece should be linked to the scale of the threat facing the euro region rather than the level of interest rates paid by the country.

A "grave and immediate" threat to the region's stability would be a condition for a rescue package, Trichet told European lawmakers in Brussels yesterday. "A level of spreads is, in my opinion, not part of this conditionality."

Greek Prime Minister George Papandreou is urging European leaders to announce an aid package that will help the debt- stricken country to reduce borrowing costs and avoid the need for a bailout. Policy makers are split over how to proceed. While Luxembourg's Jean-Claude Juncker said Europe needs to "show its colours", German Chancellor Angela Merkel said investors should not expect an announcement this week.

Trichet said any rescue should have "specific" terms and "strong conditionality" attached.

"We can only be talking about a loan without any subsidy element, that needs to be extremely clear," Trichet said.

"A loan is the only possibility in our view. There needs to be a specific set of conditions applied rigorously."

Papandreou has said he may turn to the International Monetary Fund to overcome the crisis if European Union leaders fail to agree on a lending facility, a move opposed by Trichet and French President Nicolas Sarkozy, partly because it would show the euro area cannot solve its own crises.

Greek 10-year bonds fell to their lowest since February 25, with yields rising by 11 basis points to 6.46 percent, according to Bloomberg generic yields. The risk premium investors demand to hold Greek securities over comparable German bonds widened for a third day by 13 basis points to 337 basis points.

The measures announced by the Greek government to reduce its budget deficit by four percent of gross domestic product to 8.7 percent this year "are both convincing and courageous," Trichet said.

"I expect also that the observers, the market participants and all financial institutions will realise this is convincing," he said. "The credibility of the recovery program should be progressively recognised by markets."

Standard & Poor's on March 16 dropped Greece from "creditwatch negative" and affirmed the country's investment- grade BBB+ rating, lowering the threat of an immediate credit- rating cut. At the same time, a downgrade is still possible within 18 to 24 months if the government fails to implement the austerity plan, the company said.

Moody's has said it may lower its A2 rating two steps to Baa1 if Greece only partially implements its deficit-cutting plans. That would render Greek government bonds ineligible as collateral for ECB loans if the central bank reinstates pre- crisis rules as planned on January 1 next year.

"We won't have difficulty because there won't be downgrading of the signature of Greece," Trichet said.

"If it would appear that this working assumption is too optimistic, then we will look at the situation."

The hypothesis of Greece leaving the euro area is "absurd" and "impossible legally", Trichet said. "It's not a question for today. It shouldn't be a question for tomorrow."

The euro rose from a three-week low against the dollar after the remarks and traded at $1.3543 at 7.34 p.m. in Frankfurt.

While the financial crisis has reduced global imbalances somewhat, there's a risk that they might "re-emerge" in the future, Trichet said.

"A progressive and orderly appreciation of the Chinese currency would be both in the interests of China and the interests of the prosperity and stability of the global economy," he said.