Germany has warned that the eurozone plan to save Greece from bankruptcy is not up for renegotiation, ahead of emergency talks with Greece and France.
Greek Prime Minister George Papandreou is to meet President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany in Cannes on Wednesday.
On Tuesday, Mr Papandreou said Greece will hold a referendum on the eurozone rescue plan.
He told a cabinet meeting a referendum would offer a clear mandate for austerity measures demanded by eurozone partners.
The cabinet has given unanimous backing to the plan, which could take place in December.
Stock markets earlier recorded big falls in reaction to the referendum announcement.
Mrs Merkel said Germany would make it clear in talks with the Greek PM that the plan was needed.
French Prime Minister Francois Fillon said Greece had to say without ambiguity whether it wanted to stay in the eurozone.
The BBC reports Mr Papandreou is expected to tell the French and German leaders that he had no choice: a referendum was vital to try to overcome resistance on the streets to deepening cuts - and a possible alternative of snap elections would risk Greece defaulting on its debt.
The Greek government faces a crucial confidence vote in parliament on Friday.
One MP from the governing Pasok party has resigned, cutting Mr Papandreou's parliamentary majority to two. Six other party members have called on him to resign.
The BBC says elections will almost certainly follow if the prime minister loses.
The referendum threatens to unravel a deal reached at a EU summit last week aimed at resolving the euro debt crisis, when leaders agreed on a 100 billion euro loan ($US140 billion) to Athens and a 50% debt write-off.
But in return, Greece must make deep cuts in public spending, slash pensions and wages and make thousands of civil servants redundant.
Greece's next tranche of bailout money, 8 billion euro, was approved last week, but only for payment in mid-November.