Greece is headed for another month of political paralysis ahead of a new general election in mid-June after party leaders failed to agree a coalition government.
The protracted deadlock 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. "It is heading back to elections in a few days under very bad circumstances, because 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%, Germany's DAX down 1% and the CAC-40 in France 0.7%. Greek shares were clobbered further after days of heavy losses, with the Athens stock market initially diving 4.86%, to close 3.6 % down.
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 in parliament. 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. The election campaign was dominated by the debate over Greek's dismal financial state and the strict austerity measures taken in return for the bailout.
Third-placed 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.
Mr Papoulias will now convene a new meeting of party leaders to appoint a caretaker government to manage the country until the election.
New growth figures released on Tuesday revealed the extent of Greece's crisis. The country's economy contracted by 6.2% in the first quarter of 2012, compared with the first three months of 2011, according to the Greek Statistical Authority. Greece is now in its fifth year of recession, while unemployment is at a record high of nearly 22%.