The Athens Stock Exchange plunged on the news, diving 4.86 per cent minutes after the announcement before recovering somewhat.
The May 6 election left no party with enough votes for a majority in parliament and repeated efforts over nine days to cobble together a coalition government proved fruitless.
"The country is unfortunately heading again to elections," Socialist party leader and former finance minister Evangelos Venizelos said. "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."
The protracted 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 — and anti-austerity parties on both the right and the left made huge gains in the vote.
Venizelos said the head of the small Democratic Left party, Fotis Kouvelis, had proposed forming a two-year government, but had insisted that it include the anti-bailout radical 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.
"Unfortunately arrogance, petty party politics and opportunism prevailed. Unfortunately there are many of those who trade in delusions," Venizelos said after Tuesday's talks collapsed.