ATHENS - Greek political leaders stuck to entrenched positions before another round of coalition talks on Monday, dashing hopes of a last-minute compromise to avoid a new election that risks pushing the country closer to financial default.
European shares slid and Spanish and Italian bond yields rose as investors fretted the political deadlock meant Greece was on track to become the first country to abandon the euro.
Greece's political landscape has been in disarray since an inconclusive election on May 6 left parliament divided between supporters and opponents of a 130 billion-euro (104 billion pounds) EU/IMF bailout, with neither side able to form a government.
With the country set to run out of money as early as next month and no government in place to negotiate the next aid tranche, investors are betting that a long-speculated Greek default and euro exit will happen sooner rather than later.
"There's a real risk for the market that at some point Greece will have to leave the euro if they don't find political cohesion," said ING strategist Alessandro Giansanti.
After an initial effort at cajoling party leaders into a coalition proved fruitless, President Karolos Papoulias summoned four party leaders for a fresh round of talks at 7:30PM.
But the talks appeared doomed long before they began, as the young leader of the radical leftist, anti-bailout SYRIZA party said he would not attend and another leftist leader refused to take part in any coalition unless SYRIZA was on board.
The support of at least one of those two leftist parties is crucial for conservative and Socialist parties to renew a pro-bailout coalition to steer Greece out of trouble.
The 82-year-old Papoulias was in a similar position just six months ago when he brokered an emergency coalition under strong pressure from European leaders determined to prevent a Greek collapse from sparking a market run on Spain and Italy.
This time, however, EU leaders - who have bailed out debt-stricken Greece twice only to see it fail to pass reforms - have responded more coolly to the idea of a Greek default.
Emboldened by a reinforced financial firewall to protect weak euro zone states, and by an injection of cheap money to banks from the European Central Bank, EU leaders have broken a taboo by openly discussing the possibility of Greece leaving the euro zone, stressing it is a choice for Greeks to make.
"We wish Greece will remain in the euro and we hope Greece will remain in the euro ... but it must respect its commitments," European Commission spokeswoman Pia Ahrenkilde Hansen told a regular news briefing.
"Greece has its future in its own hands and it is really up to Greece to see what the response should be."
German Chancellor Angela Merkel, leader of the continent's biggest and strongest economy, said it would be better for Greece to keep the euro.
She also said EU leaders should help it recover - but added that such solidarity would cease in what she called the unlikely event of Athens reneging on agreements.
"GOD HELP US"
The prospect of national bankruptcy and a return to the drachma appeared to be slowly sinking in among Greeks, who must now choose between the pain of spending cuts demanded in return for aid and the prospect of even more hardship without the euro.
"We have to stay in the euro. I've lived the poverty of the drachma and don't want to go back. Never! God help us," said Maria Kampitsi, 70-year old pensioner, who was forced to shut her pharmacy two years ago due to the economic crisis.
"They must cooperate or we'll be destroyed. It will be chaos. For once, they must care about us and not their own position."