An upcoming snap election in Greece could threaten the financial bailout that has helped keep the country afloat.
European stock markets mostly recovered from earlier losses after Greece announced early national elections for Jan. 25, as lawmakers failed to choose a new president in a third and final round of voting Monday. Greece's main stock index fell 3.9 per cent.
Investors are concerned that the left-wing, opposition Syriza party could gain power.
Syriza opposes the terms of a financial bailout that has seen austerity measures imposed in exchange for funding. The party has led in opinion polls for months, and promises to cancel cuts to the minimum wage and layoffs of public employees.
Populist parties have recently enjoyed a resurgence in Europe, with many winning seats in the European Parliament elections last spring.
The government's fall — 2½ years into its four-year mandate — comes among deep uncertainty over the debt-ridden country's international bailout.
Greek political uncertainty "could increase market volatility in the bond and equity markets of Italy, Portugal and Spain through highlighting potential political and economic risks," wrote IHS Global Insight's chief European and U.K. economist Howard Archer in a research note today.
In an email, market-watcher Mark Grant described the political fracas in terms of a Greek tragedy that could result in the dissolution of the eurozone.
"It will be debt forgiveness or dissolution by the looks of it and the drama will be an interesting affair no matter how the play winds its way to its conclusion," wrote Grant, a managing director at Southwest Securities. "It is likely to be a Tragedy for one side or the other with irony a strong undercurrent in the unfolding scenes."
Syriza has pledged to roll back some of the reforms the country has implemented in order to qualify for billions of euros in rescue funds from other eurozone countries and the International Monetary Fund — although it has recently somewhat softened its rhetoric about unilaterally pulling out of the bailout deal.
Syriza leader Alexis Tsipras said Monday's vote marked a "historic day for Greek democracy."
"When the majority of the people is determined to end the policies of the bailout agreements and austerity, then lawmakers can do no else than respond to their duty to keep in line with the will of the people," he said.
"Today Mr Samaras' government, which for two and a half years plundered our society and had already decided and committed to take new measures, belongs to the past," Tsipras added. "With the will of our people, in a few days, the austerity agreements will also belong to the past.
German Finance Minister Wolfgang Schaeuble warned that any new Greek government would still be expected to uphold Greece's bailout obligations.
"We will continue to help Greece help itself on its path of reform. If Greece takes another path, it will be difficult," Schaeuble said. "New elections will not change the agreements we have struck with the Greek government. Any new government will have to stick to the agreements made by its predecessor."
The conservative-led coalition government's candidate for the presidential post, 73-year-old former European commissioner Stavros Dimas, garnered 168 votes from parliament's 300 seats — short of the 180 votes needed to win.
According to the country's constitution, parliament must now be dissolved within 10 days. Prime Minister Antonis Samaras said national elections will be held "at the soonest possible date" — Sunday, Jan. 25.
"The country has no time to waste," he said in a televised address just after the presidential vote. "I am here to guarantee that the country continues on a safe course ... so that the sacrifices made and the [economic] recovery are not endangered."
With files from The Associated Press and Reuters