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 per cent, Germany's DAX down 1 per cent and the CAC-40 in France 0.7 per cent. Greek shares were clobbered further after days of heavy losses, with the Athens stock market initially diving 4.86 per cent, to close 3.6 per cent down.
The euro also fell, trading 0.3 per cent lower at $1.2794.
Tuesday's meeting of five party leaders under 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 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.
"We tried to create a government that would satisfy the minimum demands made by the electorate," Tsipras said after Tuesday's talks. "Our main demand was to cancel the new harsh measures cutting pensions and salaries and to restore labour rights."
The conservative New Democracy party won the election, but only received 18.9 per cent of the vote as angry voters scattered to smaller parties.
Papoulias will now convene a new meeting of party leaders on Wednesday to appoint a caretaker government to manage the country until the election.
Opinion polls show Syriza is likeliest to come first in the new vote, but again without enough seats in parliament to govern alone. However, as first party, Syriza would enjoy an automatic 50-seat bonus and could hope to form a coalition with the help of other left and right-wing anti-austerity parties.
"These upcoming elections will be a struggle between the left-leaning forces of nihilism in league with opportunistic populists," New Democracy leader Antonis Samaras said. "On the other side will be a European front, strong and determined."
Many Greeks seem resigned to the need for new polls, even though that will hold back the country's commitments to detail new harsh cutbacks next month while implementing pledged reforms.
"The solution is provided by democracy and democratic procedures," said Athens resident Yannis Ekaterinaris.
Another Athenian, Kostas Zaris, dismissed the idea floated by Papoulias for party leaders to agree on a cabinet of unelected technocrats.
"With a technocrat nothing can ever change," he said. "Technocrats only care about their interests and they cannot represent 50 per cent or so of the Greek people."
Analyst Dimitris Mardas strongly disagreed, saying politicians should have done their utmost to strike a deal.
"As far as the economy is concerned, this is the worst thing that could have happened," he said. "It would have been preferable to have a government of technocrats that of course would have been allowed to actually govern."
Mardas, an associate professor of economics at Thessaloniki University, said the timing of the vote for mid-June could also harm Greece's key tourism industry.
"It's just what we didn't need," he said.
New growth figures released Tuesday revealed the extent of Greece's ongoing crisis.
The country's economy contracted by 6.2 per cent 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 per cent.
Elena Becatoros contributed
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