Greece failed in its efforts to forge a "pro-European" Government 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 Greece 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 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 but they either directly rejected their participation, or they set as a condition the participation of others who, however, did not accept."

Should the country fail to secure its next tranche of loans in June it would be forced into bankruptcy and out of the euro.

The turmoil in Greece coupled with jitters over the election in France 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 it was back on the brink of default and departure from the eurozone.

The election in Greece saw an overwhelming majority vote against the parties which tried to implement structural reforms in return for a €174 billion ($286 billion) bailout package referred to in Greece as the "memorandum". The mandate to build a new Government 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 probably face resistance.

"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 short-lived."

The big winners of the election campaigned on the promise they would persuade the EU, European Central Bank and the International Monetary Fund to renegotiate 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.

Syriza, with its 37-year-old leader Alexis Tsipras, refused the call to enter coalition talks. 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.

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.

- Independent