Greece is headed for another month of political paralysis ahead of new elections in mid-June after party leaders failed to agree a coalition government.
Crucial talks failed on the day new French President Francois Hollande visited Berlin for talks with Chancellor Angela Merkel immediately after officially taking power from Nicolas Sarkozy, the leaders later saying they had agreed to discuss ways to generate economic growth in Europe.
They also confirmed that they both wanted Greece to remain part of the eurozone.
Mr Hollande, a Socialist, has criticised Mrs Merkel’s austerity-led approach to the eurozone debt crisis and called for more growth-based efforts.
During his election campaign, he called for a renegotiation of a budget-discipline pact which Mrs Merkel pushed for the continent.
Mr Hollande said after his first meeting with the German leader that “everything must be put on the table by everyone” that could promote growth.
Asked whether he was still demanding a renegotiation of the fiscal compact, Mr Hollande said he would be able to answer the question “at the end of this work”.
The protracted deadlock in Greece and the prospect of an anti-austerity party winning the new vote hammered Europe’s markets on fears that the debt-crippled country could be forced out of the European single currency, triggering shockwaves throughout the 17-country eurozone.
“The country is unfortunately heading again to elections,” Socialist party leader and former finance minister Evangelos Venizelos said after the talks under President Karolos Papoulias collapsed. “Certain people coldly put their short-term party interests above the national interest.”
Main European markets lost earlier gains, with the FTSE 100 index of leading shares shedding 0.6 per cent, Germany’s DAX down 1 per cent and the CAC-40 in France 0.7 per cent. Greek shares were clobbered further after days of heavy losses, with the Athens stock market closing 3.6 per cent down.
In the US the Dow wound up with a loss of 63.35 points, or 0.5 per cent, to close at 12,63.
A meeting of five party leaders under Mr Papoulias was a last-ditch effort to overcome the deadlock after a first election in May left no party with enough votes for a majority.
Repeated attempts over nine days to cobble together a coalition government proved fruitless, as anti-austerity parties riding on a tide of popular discontent at protracted cutbacks failed to co-operate with mainstream pro-European politicians.
The political uncertainty has worried Greece’s international creditors, who have extended the country billions of euros in rescue loans over the past two years.
PASOK’s Mr Venizelos said the head of the small Democratic Left party, Fotis Kouvelis, had proposed forming a two-year government, but insisted that it include the radical far-left Syriza party.
Syriza came a surprise second in the May 6 vote, campaigning strongly on an anti-bailout platform and calling for austerity measures to be cancelled. The party’s leader, Alexis Tsipras, has refused to join any government that will not repeal the measures.
The conservative New Democracy party won the election, but only received 18.9 per cent of the vote as angry voters scattered to smaller parties.
Mr Papoulias will now convene a new meeting of party leaders to appoint a caretaker government until the election.
EU finance ministers in Brussels yesterday agreed new rules on bank liquidity as a hedge against further economic shocks to the banking system, but could do little but watch in vain for a breakthrough in Athens.
Before talks finally broke down, Chancellor George Osborne insisted: “This is a time of considerable uncertainty in the eurozone economies... and I think we are reaching a point where we have got to make a decision to see the eurozone stand behind their currency.
“A very important part of that of course is strengthening the entire European banking system.”