A "troika" of inspectors from the European Commission, IMF and European Central Bank said Portugal's deficit targets had been revised to 5 percent of Gross Domestic Product for this year, 4.5 percent for 2013 and 2.5 percent in 2014. Previously, the bailout had envisaged deficits of 4.5 percent this year and 3 percent in 2013.

The decision marks a climbdown for the center-right coalition government, which has single-mindedly concentrated on meeting the goals as justification for harsh austerity measures which have sent the economy into its worst recession since the 1970s.

The "troika" said in a statement that the programme remained "broadly on track" but higher unemployment, falling incomes and a shift in the tax base had reduced tax revenues.

"Against this backdrop, policy choices need to strike a balance between advancing the required fiscal adjustment and avoiding undue strains on the economy," it said.

The announcement that targets will slip, coupled with new austerity measures, could strain a political consensus in Portugal, which has so far been spared the street violence and popular unrest of other suffering euro countries such as Greece.

Finance Minister Vitor Gaspar said the fiscal deterioration was caused by a worsening of the euro debt crisis, including in neighbouring Spain, which is Portugal's biggest export market.

"We are living through some of the most difficult times of our democracy," Gaspar told reporters. "We want to guarantee that we can overcome our national emergency but also be capable of preventing successive periods of financial instability, economic recession and social deterioration."

The austerity imposed by the bailout has already led to across-the-board tax increases and spending cuts, and sent unemployment to record levels above 15 percent.

Portugal is one of several eurozone countries that have struggled to meet strict fiscal goals, including Spain and Greece, as austerity deepens their recessions. Financial markets have been buoyed by an announcement last week that the European Central Bank will buy bonds of hard-hit countries.

"These relaxed targets for this year and next will still be very hard to achieve," said Ralph Solveen, an economist at Commerzbank. "But the mood in the market is still that the ECB can fix the crisis, while the measures show Europe is changing the focus to get out of the crisis via growth."

Still, more austerity is coming. The Portuguese government already announced last Friday an increase in social security taxes paid by all workers in 2013 roughly equivalent to one month's salary. Gaspar announced other tax increases on capital gains and property on Tuesday.

"Taking into account the announcement of new austerity measures just a few days ago, this will only create more problems for the government," said Viriato Soromenho Marques, a political analyst at the University of Lisbon.

"People have to know what they are making sacrifices for, and this easing of the targets sort of takes the sense out of their sacrifices. Also, the program is extended by another year and nobody will bear another year like this."

Armenio Carlos, head of the country's largest union, the CGTP, said the measures and change to the deficit targets were "implicit recognition of the failure of rightist policies", adding that he was ready to call industrial action.

A spokesman for the main opposition Socialist Party said his party would no longer be "accomplices to the wrong political choices made by the government". The Socialists had so far supported the bailout as it was the last Socialist government that requested it.

Gaspar said the eased deficit targets did not "imply any change to the programme's financial package" and Portugal still intends to return to bond markets as planned a year from now.

"Provided the authorities persevere with strict programme implementation, euro area member states have declared they stand ready to support Portugal until full market access is regained," the troika said.

Gaspar said the recession would now extend into 2013, with GDP dropping one percent next year after shrinking 3 percent this year. The government had previously said 2013 would be a year of recovery.

Portugal's benchmark 10-year bond yields ended flat on Tuesday at 8.33 percent. Yields had slid from last week's levels of over 9.2 percent as the prospect of the ECB stepping in to buy bonds lowered the borrowing costs of troubled eurozone economies.