Tuesday's move heralds the first direct public sector layoffs in more than three years of painful austerity, which have already cost nearly a million private sector jobs.
The shock announcement widened cracks in the year-old conservative-led governing coalition, with both minority partners condemning the suspension of Hellenic Broadcasting Corporation, or ERT.
"I was hoping up until the last minute that the reports were not true. It's unbelievable," news reader Stavroula Christofiliea said on ERT's main TV live broadcast moments after the news was announced.
Nonetheless, government spokesman Simos Kedikoglou — a former state TV journalist — described ERT as a "haven of waste" and said its TV and radio signals would go dead early Wednesday. He said its 2,500 employees will be compensated and the company will reopen "as soon as possible" with a smaller workforce.
It was not immediately clear how long that would take.
"ERT is a typical example of unique lack of transparency and incredible waste. And that ends today," Kedikoglou said. "It costs three to seven times as much as other TV stations and four to six times the personnel — for a very small viewership, about half that of an average private station."
Debt-stifled Greece has depended on rescue loans from its European partners and the International Monetary Fund since May 2010. In exchange, it imposed deeply resented income cuts and tax hikes, which exacerbated a crippling recession and forced tens of thousands of businesses to close, sending unemployment to a record of 27 per cent. As part of the bailout agreement, Greece's government pledged to cut 15,000 state jobs by 2015.
While lacking the prestige and popularity of other state broadcasters — such as Britain's BBC — ERT was long seen as a bastion of quality programming in a media landscape dominated by private stations. But it was also used by successive governments to provide safe jobs for political favourites, and, while nominally independent, devoted considerable time and effort to showcasing administration policies.
The broadcaster is largely state-funded, with every Greek household paying a fee through its electricity bills — whether they have a TV set or not.
Both minority partners in the fragile governing coalition said they opposed ERT's closure, through a ministerial decree that takes immediate effect but still requires eventual parliamentary approval.
Socialist PASOK accused Prime Minister Antonis Samaras' majority conservatives of ignoring its smaller partners in the coalition formed last summer to end a political crisis that threatened to push Greece out of the 17-member euro currency union.
"A coalition government made up of three partners cannot function through faits accomplis," senior PASOK lawmaker Yiannis Maniatis said. "Matters of major importance must be decided at the level of party leaders."
Private TV stations halted news broadcasts on Tuesday evening after the country's POESY media union called a lightning six-hour strike, accusing the government of sacrificing the broadcaster to appease its creditors.
"Bailout creditors are demanding civil service layoffs and the government, in order to meet its obligations toward foreign monitors, is prepared to sacrifice the public broadcasting corporation," a union statement said.
Unions representing ERT workers at three terrestrial TV stations, one satellite station and its national and regional radio network said they would keep the stations on the air, and hundreds of protesting employees gathered at the company headquarters in the Athens suburb of Aghia Paraskevi, together with opposition lawmakers and union leaders.
Protesters included main opposition Radical Left Coalition leader Alexis Tsipras, who described the move as a blow against democracy.
"This is a coup targeting ERT employees but also the Greek people which pays for public broadcasting and has the right to objective information," Tsipras said. "We warn the government not to illegally shut down the broadcast signal, and we are prepared to co-ordinate the struggle of employees and the Greek people for democracy."
Marc Gruber, director of the International Federation of Journalists in Europe also strongly condemned the move.
"We consider this a blow to democracy," he said, speaking from Brussels. "We intend to put pressure on the (Greek) government and the European Union. This is not just an issue of democracy, it is also an issue of people losing their jobs from one day to another."
ERT is the first state broadcasting casualty among Europe's bailed out countries. Portugal's state broadcaster has had its staff and budgets cut, while Ireland's RTE has cut the salaries of its highest paid stars following license-payers protests.
AP writers Derek Gatopoulos in Athens, Barry Hatton in Lisbon and Shawn Pogatchnik in Dublin contributed to this article.