Greek share and sovereign bond markets plunged on Tuesday after the government brought forward a presidential vote, in a political gamble that heightened uncertainty over the country's transition out of its IMF/EU bailout.
The surprise decision also drove yields on other lower-rated euro zone debt higher.
The vote in parliament next week could trigger early elections if Prime Minister Antonis Samaras fails to get his candidate chosen. That could open the door for the far-left Syriza party to come to power, an outcome feared by bondholders who prefer pro-business governments that stick to the rigours of the IMF/EU programme.
Athens stock exchange's main index was down 8.9 percent, setting it on course for its sharpest one-day drop since 2009. An index of Greece's listed banks fell 12 percent, with Attica Bank down 25 percent.
Euro zone finance ministers earlier said they were willing to grant Greece's request for only a two-month extension to its bailout, giving the country just enough time to wrap up a delayed EU/IMF review before it exits the programme for good.
Greece was the epicentre of the bloc's sovereign debt crisis which started in 2010 and culminated in 2012, when markets feared Athens was on the brink of leaving the currency union. In the past four years, Athens has been bailed out by its European Union partners and the International Monetary Fund to the tune of 240 billion euros.
Opinion polls show Syriza, which has vowed to end cooperation with the lenders and reverse the austerity cuts praised by bondholders, would win if early elections were held right now.
"Snap elections, if they come, does not look good for the government," said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki.
"It could easily mean that their recovery could stop short once again. And looking at Syriza's plans, it is not out of the question at all that people would start doubting again that Greecehas a future in the euro area."
Greek 10-year bond yields, which rise when bond prices fall, were up 49 basis points to 7.83 percent, having hit their lowest since Oct. 22 at 7.27 percent on Monday.
Expectations of ECB government bond purchases early next year to boost the bloc's ultra-low inflation could not prevent a rise in other low-rated euro zone bond yields. Italian and Portuguese yields were 3-6 basis points higher.
German 10-year Bund yields, which fall in times of uncertainty as investors seek refuge in top-rated assets, were down 2 bps at 0.70 percent, near record lows. European shares hit two-week lows.
Samaras needs the support of 180 lawmakers in the 300-seat chamber to win the vote, which will be held over three rounds with the first scheduled for next week and the last expected in late December.
He currently does not have that support, but some analysts say his move may indicate he is confident he can win over independent members of parliament to push his candidate, former EU environment commissioner Stavros Dimas, through.
Torgeir Hoien, portfolio manager at Skagen Tellus, said he sold all his Greek bonds "about a week ago" when it became obvious that the troika of international lenders cannot complete their final bailout review as planned in early December.
But he keeps tracking that market as a rise in yields over the next weeks or months on the back of political uncertainty could open up an opportunity to invest in Greece again.
"The troika will not push Greece out of the euro zone because of the risk of contagion," Hoien said, adding that "Syriza has mellowed in terms of realpolitik."
But Syriza spooks many others in the financial world.
"We believe the non-orthodox rhetoric coming from Syriza echoes that from the Kirchners of Argentina in the early 2000s, or from Chavez of Venezuela. We think it is real," said Charlie Robertson, global chief economist at Renaissance Capital.