By George Georgiopoulos and Renee Maltezou
ATHENS (Reuters) - Greek lawmakers passed unpopular pension and tax reforms on Monday that a European official said marked a major advance in negotiations towards unlocking more rescue funds from the country's creditors.
Euro zone finance ministers will hold talks on Greece's progress on economic and fiscal reforms later in the day, and assess if it has met terms of its multi-billion euro bailout.
A positive sign-off on the review will unlock more than 5 billion euros (4 billion pounds) to ease Greece's squeezed finances and cover debt repayments maturing in June and July.
Greece also hopes the sign-off will launch discussions on debt relief, and euro zone officials in Brussels said the finance ministers would discuss how to reprofile its debt to make future servicing costs manageable.
"We have an important opportunity before us for the country to break this vicious cycle, and enter a virtuous cycle," Prime Minister Alexis Tsipras earlier told parliament during a debate on the reforms, which opposition lawmakers voted against.
While markets welcomed the vote, thousands of demonstrators protested outside parliament. Police used teargas when isolated groups hurled petrol bombs in a central Athens square.
Under the measures passed early on Monday, a combination of social security reform and additional taxation aims to ensure Greece will attain savings to meet an agreed 3.5 percent budget surplus target before interest payments in 2018, helping it to regain bond market access and make its debt load sustainable.
Greece's 10-year bond yield hit its lowest level in four months on Monday, and European Commission Deputy President Jyrki Katainen said the package was "a major step forward".
Eurogroup finance ministers would probably not release more funds right away but further discussions on debt relief would come before a new tranche was released, he told Finnish broadcaster YLE.
'TOMBSTONE FOR GROWTH'
During the debate, opposition parties argued pension cuts and tax hikes would prove recessionary, dealing another blow to a population fatigued by years of austerity.
"The measures will be a tombstone for growth prospects," said Kyriakos Mitsotakis, leader of the conservative New Democracy party which leads in opinion polls.
Tsipras was re-elected in September on promises to ease the pain of austerity for the poor and protect pensions after he was forced to sign up to a new bailout in July to keep the country in the euro zone.
Monday's reforms are part of a package that aims to generate savings equivalent to 3 percent of GDP, raising income tax for high earners and lowering tax-free thresholds.
It increases a 'solidarity tax' and introduces a national pension, while phasing out benefits for poor pensioners.
Greeks could face a new bout of taxes within weeks.
Athens has been in talks with lenders over increasing value added tax, introducing additional taxes on fuel and tobacco, hotel overnight stays and internet use, officials said.
Finance Minister Euclid Tsakalotos said the reforms would affect the rich and not the poor. Greece had done what was expected of it and deserved debt relief, he said.
"Our word is a contract. We have done what we promised and hence the IMF and Germany must provide a solution that is feasible, a solution for the debt that will open a clear horizon for investors," Tsakalotos told lawmakers.
In Berlin, German government spokesman Steffen Seibert said the finance ministers needed to review the economic reforms before any additional debt relief could be decided on.
($1 = 0.8781 euros)
(Reporting by George Georgiopoulos and Renee Maltezou; Editing by Mary Milliken and Clarence Fernandez; editing by John Stonestreet)