European leaders' long-delayed admission that a break-up of their cherished common currency was a distinct possibility is overshadowing a two-day meeting of the world's largest and fastest growing economies beginning on Thursday in this Cote d'Azur resort.

French President Nicolas Sarkozy will welcome Barack Obama of the US, Hu Jintao of China as well as the leaders of India, Brazil, Russia and the other members of the Group of 20 leading world economies in the city made famous by its annual film festival, but the event is far from the star turn the unpopular French leader had hoped to make six months before he faces a tough re-election vote.

Sarkozy and other top EU officials have long held that it was unthinkable for Greece to quit the euro because it would be, Sarkozy has said, 'a failure of Europe'.

But in a late-night press conference with German chancellor Angela Merkel yesterday, the leaders signalled for the first time that Greece's exit from the euro was indeed possible.

Saying that Europe had 'done everything we could' to keep Greece in the eurozone, Sarkozy said 'now it is up to them to decide if they want to stay in the euro with us.'

That shift was prompted by the shock decision of Greek Prime Minister George Papandreou to call a controversial referendum on his country's USD 130 billion European bailout plan in early December that caught European leaders completely off guard and scrambling for a response.

Papandreou's stunning announcement Monday that he would stage a referendum roiled world financial markets and threw into question an ambitious and costly European deal worked out in torturous negotiations a week ago.

Merkel confirmed that Greece did not inform the rest of the eurozone about the referendum. "This did not happen in a coordinated fashion," she said.

She and Sarkozy summoned Papandreou to Cannes for talks on Wednesday at which European leaders expressed their anger and pressed him to hold the referendum as soon as possible.

A 'no' vote in the referendum would have enormous consequences not just for Greece but for the rest of Europe.

It could lead to a disorderly Greek default, force Greece out of the 17-nation eurozone, topple many fragile European banks and send the global economy spinning back into recession.

Sarkozy's office announced yet another round of discussions about Greece for this morning, with Germany, Italy, Spain, the IMF and the European Union. The talks will notably not include Greece itself.

Playing hardball, eurozone officials said an 8 billion pounds (USD 11 billion) loan that Greece needs within weeks to avoid bankruptcy was conditional on Greece backing the latest rescue deal.

Sarkozy had hoped the meeting of leaders of the Group of 20 leading world economies, in Cannes on Thursday and Friday, would be Europe's chance to assure the rest of the world that a comprehensive plan to deal with its debt crisis had finally been reached after nearly two years of half-measures and procrastination.

Papandreou's gambit ended that lofty ambition and likely derailed Sarkozy's hopes of transforming a successful summit into a boost to his own re-election chances.