Greek Prime Minister George Papandreou plunged the euro and stock markets back into crisis on Monday with a shock announcement that he would put a hard-fought rescue deal to a referendum.
With leaders of the world's 20 biggest economies getting ready for a summit from Thursday focused on the economic crisis, Papandreou's unexpected move triggered fears that the rescue efforts could begin to rapidly unravel.
The premier also announced a vote of confidence but his narrow parliamentary majority was then cut by the defection of a deputy.
And Vasso Papandreou, a senior member of the ruling Socialist party and head of parliament's economic affairs committee, said Greece needed a unity government and early elections.
Analysts said the confidence and referendum votes amounted to a ballot on the future of the eurozone which is also under pressure from debt strains in Italy.
All of Europe's main stock markets registered sharp falls at the new risk of Greek default and contagion, with the German blue-chip DAX 30 stocks index slumping by more than five percent, French shares were down over four percent and London's stocks fell more than three percent.
Athens witnessed a meltdown as stocks plunged 6.31 percent amid warnings that a rejection of a deal that is deeply unpopular in Greece would force it to leave the 17-nation bloc which uses the euro single currency.
"This is a referendum, in which they're effectively voting on Greece's euro membership," Alexander Stubb, the Europe minister for Greece's fellow single currency member Finland, told the commercial MTV3 network.
In a sign of the deep unease in European capitals, French President Nicolas Sarkozy and German Chancellor Angela Merkel were to hold talks by phone.
Italian Prime Minister Silvio Berlusconi, another leader under pressure as a result of the eurozone crisis, registered his sense of shock and annoyance.
"There is no doubt the Greek decision to hold a referendum on the European Union's rescue plan is having a negative effect on the markets," he said. "This is an unexpected decision that generates uncertaintiesafter the recent European Council and on the eve of the important G20 meeting in Cannes."
Italian stocks plunged 6.12 percent, led by big falls for banks.
Papandreou, who now has 152 deputies in the 300-seat Greek parliament, has faced increasing dissent within his own party over the tougher austerity policy monitored by the EU and the International Monetary Fund that has sparked general strikes and widespread protests, many of them violent.
As well as agreeing to a referendum, which is likely to take place early next year, the prime minister will submit himself to a confidence vote in parliament to be held on Friday -- the second day of the G20 summit in Cannes.
"The command of the Greek people will bind us," Papandreou said as he made his stunning declaration late Monday.
"Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted."
Although the deal agreed last Thursday after marathon talks in Brussels included an agreement to write off 100 billion euros ($137 billion) of debt owed by Greece, the Athens government still has to implement a painful package of austerity measures to get its hands of bailout funds.
In a survey in the To Vima news weekly on Sunday, 58 percent of Greeks termed the deal 'negative' or 'probably negative', although over 72 percent of those polled said Greece should remain in the euro.
In an online commentary, the Moneycorp currency broker said Papandreou had presented Greeks with "the ultimate Hobson's Choice"."
"They could either have their financial eyes ripped out by austerity measures or by the chaos that would follow the total bankruptcy of Greece and the wipe-out of its financial institutions," it said.
Nicola Rossi, an opposition senator in Italy, warned the mounting cost of borrowing for the government in Rome had the potential to further scupper attempts to safeguard the euro.
Under last week's deal, the eurozone plans to increase the stockpile of cash in a bailout fund to some one trillion euros but many observers suspect that it will be an insufficient firewall if a country of the size of Italy collapses.
"The Greek government's decision has unleashed havoc on the markets. It wasn't very well thought through," Rossi, an economist, told SkyTG24.
"The problem is that Italy is the weak link in the euro chain so we are under particular scrutiny."
"We all know that when our borrowing rate is close to seven percent our debt risks becoming unsustainable. The situation is extraordinarily serious."
In a report released on Monday, the Organisation for Economic Cooperation and Development (OECD) said that rapid action by EU leaders to enact the rescue measures that they had agreed was key to the prospects of global recovery.