The dispute is the latest challenge facing Prime Minister Antonis Samaras's government, which is struggling to reach agreement both internally and with the troika of European Union, European Central Bank and International Monetary Fund lenders on an unpopular package of spending cuts worth nearly 12 billion euros.

Government officials said the dispute erupted at a Wednesday evening meeting between the finance minister and senior troika officials, hours after Athens said the two sides had narrowed differences and were closing in on a deal. The troika's approval is essential for Athens to unlock further aid.

"There was tension at last night's meeting," a senior government official said.

"There is disagreement about the effectiveness of the measures on restructuring the public sector."

A second government official also said the talks were marked by tension over state sector reform but that the meeting concluded on a "smoother note" and that both sides remained in constant contact.

"The latest picture is much more smooth," the official said.

Earlier on Wednesday, Greece had raised hopes of a swift conclusion to the negotiations by saying the two sides had found agreement on measures worth 9.5 billion euros in the 11.7 billion euro package. The troika had initially rejected 4 billion euros in austerity cuts proposed by Athens, largely over contentious state sector reform and timid plans to fire civil servants.

The second official said the agreement on 9.5 billion euros worth of measures still held despite the later dispute. The two sides would resume discussions on Thursday, officials said.

Those talks are expected after a Thursday afternoon meeting of party leaders in Samaras's fragile coalition, which has increasingly shown signs of buckling under the strain of finding common ground on the deeply-reviled austerity package.

Samaras's Socialist and leftist allies - under pressure from their voter base to fight the latest round of belt-tightening - have made increasingly defiant noises in recent days against plans to axe civil servants and slash wages and pensions..

The austerity plan - which targets savings over 2013 and 2014 - includes cuts to health and defense spending, a controversial plan for a "labour reserve" to dismiss civil servants, and reductions in welfare and disability benefits

The government is also coming under pressure from a series of anti-austerity protests picking up pace after the traditional August summer break. Athens faced disruptions on Thursday as subway, city train and tram workers held a 24-hour strike, and major unions are gearing up for a general strike next week.

Still, Samaras's allies have signaled they will eventually sign up to the austerity package after weeks of wrangling and government officials are pinning hopes on a deal by Sunday, after Samaras returns from a trip to Italy.

(Writing by Deepa Babington. Editing by Jeremy Gaunt.)

• A Permanent Economic Emergency