Greek election winner Syriza has gained key support from an anti-bailout party to form a new government.
The right-wing Independent Greeks party said today it would back left-wing Syriza leader Alexis Tsipras to be the next prime minister, after he fell just short of a majority needed to govern following yesterday's poll.
The surprise alliance between two staunchly anti-bailout parties, spooked markets and triggered a loss of nearly 4% on the Athens Stock Exchange as well as elsewhere in Europe.
Mr Tsipras has promised to renegotiate Greece's massive bailout agreements, but has promised not to take any unilateral action against lenders from other eurozone countries.
Greece set itself on a collision course with the rest of Europe last night after handing a stunning general election victory to a far-left party that has pledged to reject austerity and cancel the country's billions of euro in debt.
In a resounding response to the country's loss of financial sovereignty, Greeks gave Syriza 36.5pc of the vote, according to the first official projections.
It will be able to send between 149 and 151 MPs to the 300-seat parliament - tantalisingly close to a majority. The final result was too close to call but if the party wins 150 seats or fewer it will have to form a coalition - possibly with the Independent Greeks, a right-wing party that also opposes the international bail-out.
New Democracy, the conservative party which had governed since 2012, won just 27.7pc of the vote.
Led by the charismatic former communist Alexis Tsipras (40), Syriza is now likely to form Europe's first anti-austerity government. The party, a motley collection of communists, Maoists and socialists, wants to cancel a large part of Greece's €320bn debt, which at more than 175pc of GDP is proportionally the world's second highest after Japan.
The debt is equivalent to nearly €30,000 for each Greek citizen.
Greece has enough money to meet its immediate funding needs but it faces around €10bn of debt repayments over the summer.
Without fresh cash, it will be unable to meet the payments - raising the spectre of an exit from the euro and renewed turmoil in the world markets. Last night, the euro had already started to fall in early trading in the eastern currency markets.
But Mr Tsipras insists he wants to stay in the eurozone and fears of a so-called "Grexit" and a potential collapse of the currency have been less severe than during Greece's last general election in 2012.
Cuts imposed by international lenders have produced deep suffering, with the economy contracting by a quarter, youth unemployment rising to 50pc and 200,000 Greeks leaving the country.
Mr Tsipras has pledged to reverse many of the reforms that the hated "troika" of the EU, IMF and European Central Bank have imposed, including privatisations of state assets, cuts to pensions and a reduction of the minimum wage.
The result will reverberate in countries such as Italy, Spain and Portugal, where the rejection of German-inspired austerity is also growing.
"We have a historic victory that sends a message that does not only concern the Greek people, but all European peoples," said Panos Skourletis, Syriza's spokesman.
The party's victory was quickly seized on by the European left. "Hope is coming, fear is fleeing," said Pablo Iglesias, the head of Spain's anti-austerity party, Podemos,
"In Greece tonight, we are already hearing that. We are hoping we will hear the same thing in Spain soon."
Costas Douzinas, a professor of law at the University of London, said: "Syriza winning an outright majority is huge for Europe, an earthquake.
"If a tiny country like Greece can stand up to the lenders … the message to the Spanish, Portuguese and Italians will be that they too can stand up at some point."
But before the official results were even announced, there were stern warnings from Berlin that it would not tolerate a rejection of austerity.
"I hope the new government won't call into question what is expected and what has already been achieved," said Jens Weidmann, the president of the Bundesbank.
Many Greeks remained unconvinced that Syriza would be able to renege on Greece's debts or reverse austerity.
"Tsipras promises a lot but I don't think he will be able to deliver. How can he do all the things he has promised? We don't have the money," said Kostas Maganias (65), the owner of a bar in Athens.
Syriza, which showed explosive growth in the last election in 2012, has increased in popularity in the last two years due to the austerity reforms.
Continual cuts and tax rises made it impossible for Greece to escape a deep recession.
The Greek rebellion against its EU economic overlords may provoke a prolonged economic siege as Syriza seeks to negotiate new terms for a bailout while the EU waits for a lack of money to force Greece to comply with existing agreements.
Professor Aristides Hatzis of the University of Athens says: "It is like a game of chicken, with Greece and the EU driving towards each other and each hoping the other will swerve first to avoid a collision."
He adds that one must keep in mind the disparity in power between the two drivers.
"The EU leaders are driving a German Mercedes and the Greeks are in a beat-up old jalopy."
A new Greek government will immediately face problems because the creditor states have frozen $8.8bn in loan disbursements while the present government has reached a $17.4bn ceiling for bond sales under the EU programme.
A Syriza government would have to rely on taxes but revenues are down as people wait to see if taxes will be reduced by the new government. This means Greece may only have enough until the end of February to pay state employees and pensions and service the debt. (© Daily Telegraph, London)