World markets plunged on Tuesday after the European bailout plan was thrown into disarray by the Greek prime minister's demand for a referendum on the proposal.

George Papandreou stunned investors, as well as his own citizens and his partners in the eurozone, by announcing late Monday that a plebiscite will be held in what he called "a supreme act of democracy and of patriotism for the people to make their own decision."

A confidence vote in the Socialist government will also take place on Friday, following some high-profile defections. 

Legislator Milena Apostolaki's office said Tuesday she had declared herself an independent deputy in a letter to the parliament Speaker.

"The crisis in the country has taken on uncontrollable dimensions and is threatening the cohesion of Greek society," Apostolaki said in her letter announcing her party resignation.

Papandreou appeared to have the slim majority he will need to survive that vote in parliament. But six of Papandreou's own MPs put their names to a letter urging him to resign and allow the election of a new government well ahead of the next elections scheduled for 2013.

Papandreou appears to have added to his troubles by telling few people about his decision beforehand, leaving even Finance Minister Evangelos Venizelos in the dark.

Loonie tumbles

Investors reacted swiftly to the uncertainty. "The market's reaction was swift and furious," BMO strategist Andrew Busch said: "Sell risk."

The Canadian dollar plunged on the news, closing down 2.18 cents at 98.15 cents US.

Equities didn't fare much better, with the S&P/TSX composite index closing down 136.96 points, or a little over one per cent, at 12,115.10. The Dow Jones industrial average was down 297.05 points, or 2.5 per cent, to 11,657.96.

'Now is discipline time for Greece, for Europe and for the markets.' —BMO strategist Andrew Busch

Commodities were lower across the board. Oil was off one dollar at $92.19 US a barrel. Gold lost $13.40, closing at $1,711.80 US an ounce.

Those losses came after European investors had their chance to dump their shares in Europe, first. Unsurprisingly, Greek shares led the retreat. The Athens Stock Exchange's benchmark general index fell 6.8 per cent just after trading started Tuesday, with the bank index losing more than 13 per cent.

Germany's DAX was five per cent lower, while France's CAC-40 dropped 5.4 per cent. The euro fell to a daily low of 1.35 US while borrowing rates jumped higher for Italy and Spain, considered the next weakest links in the crisis.

Plan jeered

The referendum — the country's first since 1974 — is expected to be held early next year. The renewed uncertainty it creates deflated any remnants of optimism over last week's grand European plan to contain the debt crisis. After weeks of complex negotiations, eurozone leaders agreed last Thursday that private holders of Greek bonds should take a 50 per cent loss on their holdings, reducing Greece's debt burden to 120 per cent of national income by 2020 from around 180 per cent at present.

With polls suggesting two-thirds of Greeks are opposed to the bailout terms, the referendum is unlikely to succeed whether Papandreou can hold on to power or not.

Markets fear a ‘no’ vote would result in a disorderly debt default and Greece's exit from the common currency.

"The relief that was sweeping over Europe has been replaced with a jump in uncertainty," said Scotia Capital chief currency strategist Camilla Sutton.

"This political nightmare might actually seal Greek's fate and push it out of the European Monetary Union."

A messy default by Greece would also threaten the stability of larger economies like Italy’s, which are too expensive to rescue.

As that country's borrowing rates soared Tuesday, Premier Silvio Berlusconi held emergency talks with his key economic ministers.

Greek deputy defects

A Greek governing party deputy has defected over the prime minister's surprise decision to hold a referendum on a European debt deal, leaving the Socialists with only a two-seat majority in parliament.

Milena Apostolaki's office said Tuesday she had declared herself an independent deputy in a letter to the parliament Speaker. The move leaves the governing Socialist Party with 152 seats in the 300-member legislature.

Prime Minister George Papandreou has not set a date for the referendum, expected to be held early next year. He has also called a confidence vote in his government on Friday.

Source: Associated Press

German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to hold emergency talks on Greece with the EU, the IMF and eurozone leaders on Wednesday.

A separate meeting with the Greek government is also planned ahead of the Thursday summit of leaders from the G-20 economic powers in Cannes, France.

"Germany and France jointly with their European partners are determined to guarantee the full and swift implementation of the summit's decisions, which are more necessary today than ever," a statement from Merkel's office said.

Referendum call a 'dangerous decision'

Jean-Claude Juncker, who chairs eurozone ministerial meetings, said that planning a referendum "is a dangerous decision" that could put Greece's next bailout loans at risk.

Athens runs out of money to pay pensions and salaries by mid-November and faces bond redemptions in December.

"It changes the circumstances," Juncker said in a radio interview on RTL in Luxembourg, according to his spokesman Guy Schuller.

And Robert Zoellick, head of the World Bank, called the referendum a "roll of the dice" that will heighten uncertainty in financial markets.

Zoellick told reporters that a rejection of the package by Greek voters would cause a "mess" that would raise doubts about Greece's commitment to accepting painful budget cuts that it needs to qualify for bailout loans from the eurozone and the International Monetary Fund.

"The world economy is still wobbly ... and it could dip very quickly if momentum is not maintained and built upon," Zoellick said.

He said global investors will be watching the outcome of the summit meeting of leaders from the Group of 20 major economies on Thursday and Friday in Cannes, France.

"Market confidence will be based on whether governments ... follow through" with their commitments, Zoellick said.

With files from The Associated Press