Greek threat to euro spooks world's stock markets

Financial markets took fright on Tuesday as Greece took another step towards leaving the euro by rejecting "barbarous" international bail-out deals.

Stock markets around the world fell sharply as fears grew that Greece was moving towards a euro exit following Sunday's general election, where parties rejecting internationally-imposed austerity measures made major gains.

Alexis Tsipras, the head of Greece's radical Left-wing Syriza party, said that the result "nullified" bail-out deals with the European Union and International Monetary fund.

Adding to the sense of panic over the eurozone, European Union leaders said they would hold an emergency summit later this month to discuss the latest phase of the European debt crisis.

The European Commission called for a major increase in the EU budget to fund "growth-enhancing measures", a proposal Britain has pledged to oppose.

The EU meeting will be the first attended by Francois Hollande, the new French president, who was elected last weekend on a promise to challenge austerity policies imposed to reduce government deficits and reassure markets about governments' abilities to repay their debts.

Greece has received £190 billion in aid. In exchange, it is required to make deep cuts in public spending. Tsipras called the loan agreement policy "barbaric". The Left-wing leader, whose party came second in last weekend's election, has been given three days to form a coalition government with other anti-bail-out parties. He is thought to be unlikely to succeed, raising the prospect of a second election where parties opposing the bail-out would seek a clear majority in parliament.

Rejecting the bail-out would almost certainly mean Greece would be forced to leave the single European currency, the first member to do so.

The renewed prospect of a Greek exit spread fear through financial markets, pushing down share prices around the world.

The FTSE-100 index of leading British shares fell by 1.8% yesterday. German shares were down 1.9% and the Paris market dropped by almost 3%. In early trading in New York the Dow Jones fell by 0.95%. Many investors switched their money into British and German government bonds, forcing down the interest rates - yields - that governments pay on those loans.

Yields on British government bonds - gilts - came close to a record low.

Low gilt yields mean low borrowing costs throughout the economy, but they also cut the return that pensioners receive when they buy annuities.

Even though many international banks have reduced their exposure to Greek debt significantly, there remain fears that a Greek default and exit could create a precedent that would lead to bigger economies leaving the euro.

Jose Manuel Barroso, the president of the European Commission, warned Greek politicians that their country had to honour the terms of the bail-out agreements.

Barroso said one way of promoting economic growth would be to increase the Brussels budget by 6.8%, which would cost British taxpayers an additional £890 million.

David Cameron has promised to oppose any above-inflation increase in the EU budget.