The German Chancellor and the head of the International Monetary Fund (IMF) have warned of financial contagion unless a eurozone debt crisis is stopped in Greece.
Angela Merkel, whose government has been accused of delaying its approval of a bailout package, said the crisis marked a turning point for the European Union.
“The future of Europe and the future of Germany within Europe is at stake,” Mrs Merkel said.
Her comments came as the European Commission forecast that the Greek economy would shrink by 3% this year.
Meanwhile the IMF head Dominique Strauss-Kahn admitted there was a danger that “contagion” could engulf other weakened European economies.
“There are always risks,” Mr Strauss-Kahn said.
“We must avoid contagion, and that is also what the Greek plan was tailored to do. We must nevertheless all remain extremely vigilant.”
Fears of financial turmoil spreading from Greece triggered a major sell-off of European and American stocks on Tuesday, which spread to Asian markets on Wednesday.
The euro also fell to new one-year low of under 1.30 dollars.
Shares in Spain and Portugal, seen as the next two targets for investors testing the European Union’s ability to defend weak eurozone economies, fell for a second straight day.
In Britain the FTSE 100 experienced a quieter start on Wednesday after losing 2.5% of its value on Tuesday due to the Greek crisis, as well as falls in BP and mining shares.
The Greek government has agreed to slash spending and hike taxes in return for 110bn euros (£94bn) in loans over three years from eurozone countries and the IMF.
However, mass protests have been taking place in Greece as the government attempts to pass its austerity programme through parliament.
“Given the scale of the public opposition to the austerity measures it is still unclear whether Greece will ultimately be willing to take years of fiscal punishment and recession to get its fiscal house in order,” said economist Ben May at Capital Economics.
“Accordingly, it is still unwise to rule out the government eventually defaulting or restructuring its debts,” he added.
