Debt-stricken Greece must prepare for its second elections in less than two months after failing to form a government, exacerbating the eurozone crisis which France and Germany vowed to resolve.

Tourists look at souvenirs in the Monastiraki neighborhood of Athens. Debt-stricken Greece must prepare for its second elections in less than two months after failing to form a government, exacerbating the eurozone crisis which France and Germany vowed to resolve. (AFP Photo/Louisa Gouliamaki)

"We are going again towards elections ... under very bad conditions," Pasok party leader Evangelos Venizelos said Tuesday after the last-ditch talks failed.

"The Greek people must now make the right decisions for the good of the country," stressed Venizelos, who supported the EU-IMF deal in a technocrat government formed last November.

President Carolos Papoulias is due to meet party leaders at 1000 GMT Wednesday to set up a caretaker administration to operate until the re-run polls, for which no date has yet been officially announced.

With no guarantee that the fresh vote will produce a viable government, the prospects are for continued volatility and uncertainty over whether Greece's future in the single currency club.

But Athens got top-level backing late Tuesday from Germany's Angela Merkel and France's Francois Hollande, meeting for the first time just hours after the new French president's inauguration.

"We want Greece to stay in the euro," Merkel said at a joint press conference with Hollande in Berlin.

The German chancellor added that the two European powerhouses were prepared "to study the possibility of additional growth measures in Greece" if Athens said they needed them.

At the same time, Hollande, pushing for growth over more austerity, said he was prepared to "put everything on the table" at a forthcoming informal summit of EU leaders in Brussels on May 23, including the topic of eurobonds, which creates friction with Germany.

International Monetary Fund head Christine Lagarde on Tuesday raised the possibility that Greece could leave the eurozone, albeit in an orderly fashion.

"If the country's budgetary commitments are not honoured, there are appropriate revisions to do, which means either supplementary financing and additional time or mechanisms for an exit, which in this case must be an orderly exit," Lagarde said in an interview with France 24.

"It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider," she said.

Greece has "undertaken important reforms, they have made a certain number of sacrifices," Lagarde said. "To throw all of this away because of profound political disagreements, it's really a shame for the Greek people."

Papoulias had called Tuesday's meeting to discuss, in the absence of any other solution, a government of "distinguished and non-political figures" which would defuse the impasse over the EU-IMF austerity measures.

Figures Tuesday showing the Greek economy slumped a massive 6.2 percent in the first quarter compared with a year earlier, fuelling the argument that the austerity policy is simply not working and the emphasis must turn to growth.

The response to the talks breakdown on the financial markets was immediate, with European and US stocks turning lower and the euro slumping below $1.28, levels not seen since January.

At around 2200 GMT Tuesday the euro was at $1.2728 compared to $1.2823 Monday in US trading.

Asia opened Wednesday still in negative mood, with shares in Hong Kong down 1.20 percent at the open.

The push lower came as more analysts and traders were taking seriously the prospect that Greece would exit the eurozone whatever happens in new polls.

Mike McCudden at Interactive Investor said Greece posed a problem of contagion for other weaker eurozone members, namely Spain and Italy, as Europe sees "a general backlash against austerity measures."