Greece failed in its efforts to forge a "pro-European" government last night after a watershed election in which nearly two-thirds of voters rejected the reform programme which has underwritten the country's international bailout.
The prospect of stalemate in Athens, fresh elections next month and a possible exit from the euro sent markets plunging, while Angela Merkel, the German Chancellor, warned that Europe's most embattled economy must stick to its commitments to international lenders or face default.
Greece's two main parties were locked in talks over a government of national unity but a collapse in their support left them with only one-third of the vote, no parliamentary majority and no obvious coalition partner.
Antonis Samaras, leader of first-placed party New Democracy, announced in a televised address last night that he had done "everything possible" but had failed to build a coalition, handing the mandate back to the President. "We directed our proposal to all the parties that could have participated," he said, "but they either directly rejected their participation, or they set as a condition the participation of others who, however, did not accept."
While new forces like the radical left Syriza party, who came second on Sunday, celebrated the overthrow of the two-party system, analysts warned that Greece may be left without a government and forced to return to the polls next month. Should the country fail to secure its next tranche of loans in June then it would be forced into bankruptcy and out of the euro, a prospect that rattled global stock markets.
The turmoil in Greece coupled with jitters over the election in France on Sunday that brought the Socialist François Hollande to power initially pushed shares down to the lowest levels for more than four months. The Greek market plunged 8 per cent in early trading as investors bet that it was back on the brink of default and departure from the eurozone.
David Buik, stock market watcher at BGC Partners, said that despite markets calming their concern over the intentions of Mr Hollande, there was potential for trouble elsewhere. "France is a far more conservative country than the UK. Mr Hollande knows that, he knows he has got to make it work with Merkel. Greece is where the trouble remains."
The election in Greece saw an overwhelming majority vote against the parties who tried to implement a programme of structural reforms in return for a €174bn (£140bn) bailout package referred to in Greece as the "memorandum".
The mandate to build a new government now passes to the second-placed party Syriza, a radical leftist group that rejects the memorandum. Even if another coalition formula can be found in the next two days it would have a slim majority and most likely face resistance inside and outside parliament. "A pro-memorandum government will have no legitimacy whatsoever," warned Philip Ammerman, an Athens-based financial analyst. "Whatever government comes out of this will be shortlived."
The big winners of Sunday's election campaigned on the promise that they would persuade the troika – the EU, European Central Bank and the International Monetary Fund – to renegotiate the terms of the memorandum. Parties like Syriza told voters the austerity-or-chaos dilemma was a false one and that they had the opportunity to "send a message to Europe" by ignoring threats of an imminent default and euro exit.
The smaller parties who benefited from Sunday's protest vote have little incentive to join a unity government that would be under pressure to push through unpopular cuts and reforms. Syriza, with its 37-year-old leader Alexis Tsipras, refused the call from New Democracy to enter coalition talks and left the door open to a "government of the left". "The probability is that we'll go to elections again straight away," said a party source.
Having seen its share of the vote leap from 3 per cent to nearly 17 per cent, the leftists are holding out for an election that could see them emerge as the top party, which under Greek election laws would give them a bonus of 50 more seats.
The entrance into parliament of fringe parties, including the neo-Nazi Golden Dawn and ultra-nationalist Independent Greeks, has left observers concerned over Greece's international image as well as its European future. Nikos Konstandaras, a political columnist, said the lesson from Sunday's vote was "that when things go wrong in Greece it's the moderates who get punished and the extremists who benefit".
Timeline: a day of turbulence on the markets
9am Greek stock market opens and immediately falls sharply following election in which support for main parties slumps. Banking index plummets by 19 per cent. French market opens and falls; euro slumps to its lowest level against the dollar in three months. Investors look to take advantage of safe havens, with yields on 10-year German bonds falling to 1.56 per cent – close to all-time low of 1.54 per cent.
9.30am Yields on Greek 10-year bonds hit 23 per cent. Credit default swaps (insurance against nations not being able to repay their debts) in France, Spain and Italy all rise.
11.15am French market rallies, but still down 0.3 per cent on overnight trading. German Dax index down 0.9 per cent. Ratings agency Standard and Poor's say President Hollande's victory would have no immediate effect on French rating.
12.30pm Greek market still falling, with index down 7.4 per cent.
1.20pm Greek president Carolos Papoulias, left, tells conservative leader Antonis Samaras, right, he has a mandate to form an administration.
Negotiations begin with a deadline set at three days to form a "government of national salvation".
Makes initial advances to anti-austerity party Syriza, which gained 16.6 per cent of the vote.
1.40pm Analyst at Citigroup claims likelihood of Greece leaving the eurozone in next 18 months is 75%, an outcome the head of the Eurozone Stability Facility, Klaus Regling, says is "catastrophic".
2.40pm Wall Street opens and falls immediately. Dow Jones opens some 20 points lower at 13013, a 0.2% drop. The Nasdaq and S&P 500 have erased early losses and edged into positive territory.
3.15pm The leader of the runner-up party in Greece's national election, the Radical Left Coalition's Alexis Tsipras, has rejected a coalition with the winning conservative party.
4.45pm Antonis Samaras' attempt to form a pro-euro coalition government under his leadership appears to have failed in the space of just a few hours, raising the prospect of a fresh election next month.
5.10pm Greek shares down lost 7.2 per cent on the day, though the banks themselves only eased by 4 per cent.