By John O'Donnell and Jan Strupczewski
FRANKFURT/BRUSSELS, Feb 4 (Reuters) - The European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding on Wednesday, shifting the burden onto Athens' central bank to finance its lenders and isolating Greece unless it strikes a new reform deal.
The move, which means the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks, was a response to what many in Frankfurt see as the Greek government's abandoning of its aid-for-reform program.
The decision came just hours after Greece's new finance minister Yanis Varoufakis emerged from a meeting with ECB President Mario Draghi to claim that the ECB would do "whatever it takes" to support member states such as Greece.
In stark contrast, the ECB move, which required the support of a majority of central bank chiefs across the euro zone, shows widespread dismay with the new Greek government's plans not only in Frankfurt but across the 19-country bloc.
The ECB announced its decision, which will take effect from Feb. 11, after those governors met in Frankfurt on Wednesday.
It means that the tens of billions of euros of Greek government bonds as well as bank bonds guaranteed by Athens will no longer qualify as security in return for ECB funding to those banks.
Instead, it will now be up to Greece's central bank to provide those banks with Emergency Liquidity Assistance (ELA), a step it takes at its own risk, ringfencing those banks' funding problems from the rest of the euro zone.
Were the central bank to run into difficulties as a result, it would be up to the debt-strapped Greek government, which can ill afford it, to step in.
The unexpected move followed an appeal from Greece's new leftist government to the ECB to keep its banks afloat as it seeks to negotiate debt relief with its euro zone partners.
The ECB has now effectively refused this request, adding to Greece's problems as Germany rejected any roll-back of agreed austerity policies.
The ECB move was a setback for Greece's Varoufakis, who had earlier pledged speedy talks with international lenders on setting up a new program of reform after abandoning its earlier aid plan.
It puts Greek banks in a difficult position. Two Greek banks had already begun to tap emergency liquidity assistance from the Bank of Greece after an outflow of deposits accelerated after the victory of the hard left Syriza party in a general election on Jan. 25, banking sources had told Reuters.
The health of Greece's big banks is central to keeping the country afloat.
Promising to end five years of austerity, Prime Minister Alexis Tsipras and Varoufakis are meeting senior officials across Europe to seek support for a new debt agreement.
However a document prepared by Germany for a meeting of EU finance officials on Thursday made clear Berlin wants Athens to go back on promises to raise the minimum wage, halt unpopular sales of national assets, rehire fired public sector workers and reinstate a Christmas bonus for poor pensioners.
"The Eurogroup needs a clear and front-loaded commitment by Greece to ensure full implementation of key reform measures necessary to keep the program on track," the document, seen by Reuters, said in reference to euro zone finance ministers.
"The aim is the perpetuation of the agreed reform agenda (no roll back of measures), covering major areas as the revenue administration, taxation, public financial management, privatization, public administration, health care, pensions, social welfare, education and the fight against corruption."
The new Greek leaders have had a cool reception even in left-leaning countries such as France and Italy which Athens had hoped would support its case for debt relief.
French President Francois Hollande said the euro zone's rules applied to everyone. European Parliament President Martin Schulz, a Socialist, said Greece risked bankruptcy if the country didn't stick to its commitments to EU partners.
Tsipras, 40, said after talks with European Commission President Jean-Claude Juncker that Greece respected European Union rules and would find a solution to its economic problems within the framework of EU law.
After meeting Draghi, Varoufakis told Reuters: "The ECB is the central bank of Greece ... The ECB will do whatever it takes to support the member states in the euro zone."
Without the support of its creditors and the ECB, Greece may soon find itself back in an acute financial crisis. Unable to tap the markets because of sky-high borrowing costs, the government has enough cash to meet its funding needs for the next couple of months. But it faces around 10 billion euros ($11 billion) of debt repayments over the summer.
"We outlined to him the main objectives of this government which is to reform Greece in a way that has never been tried before and with a determination that was always absent," Varoufakis said after his session with Draghi.
"We also stated categorically that the debt-deflationary cycle in which Greece finds itself is detrimental to all efforts to reform Greece."
With the Greek public determined to cast off the stigma of supervision by a troika of EU, IMF and ECB inspectors, and to regain economic sovereignty, the semantics of any new arrangement may be crucial.
A source familiar with the Greek position said after the talks with Draghi: "We are thinking of a bridging program. You may not call it a 'program' for political reasons but perhaps a contract."
The German document demanded that troika oversight continue.
ECB officials in the meeting talked about the rules on emergency funding and their desire that the Greeks reach an interim arrangement with the Eurogroup of euro zone finance ministers, which next meets on Feb. 16, the source said.
Tsipras won the election promising to negotiate a debt write-off, reverse some key reforms and end budget cuts. (Writing by Paul Taylor; Editing by Andrew Roche)