German Chancellor Angela Merkel and the head of the IMF warned of financial contagion on Wednesday unless a euro zone debt crisis is stopped in Greece, while investors fled to the safe havens of the dollar and gold.
Greek public and private sector workers shut down airports, tourist sites and public services in a general strike against harsher austerity, accepted by the government as the price for a 110 billion euro ($142.27 billion) EU/IMF bailout on Sunday.
Merkel told parliament Europe's fate was at stake in the most serious crisis in the single currency's 11-year lifetime, and other euro zone countries could suffer the same fate as Greece unless the international rescue succeeds.
Anxiety over a widening of the euro zone debt crisis sent stocks tumbling worldwide, and the euro to a new one-year low.
Shares in Spain and Portugal, seen as the next two targets for investors testing the European Union's will and ability to defend weak euro zone economies, fell for a second straight day.
Merkel, whose foot-dragging on aid for Greece many analysts blame for aggravating the crisis, told parliament the success of the rescue package would determine "nothing less than the future of Europe — and with it the future of Germany in Europe."
"We're at a fork in the road," she said in a debate on approving Berlin's 22 billion euro contribution to the emergency loans for Athens despite hostility among the German public.
Without the rescue package, a chain reaction threatened to destabilize the European and international financial system, she warned.
The head of the International Monetary Fund acknowledged the risk of the debt crisis spreading from Greece to other European countries but said he saw no real threat to the big euro zone states such as France and Germany.
"There is always a risk of contagion," Dominique Strauss-Kahn told French daily Le Parisien. "Portugal has been mentioned, but it is already taking measures and the other countries are in a much more solid situation ... but we should remain vigilant."
Strauss-Kahn criticized the 15 other euro zone governments for charging Greece a 5 percent interest rate on the loans, largely at Germany's insistence.
"I think the rate at which the Europeans lent should have been equal to that of the IMF, which is lower by more than half a point," he said.
A sell-off of euro zone assets wiped billions off the main European stock markets on Tuesday, where leading European shares dropped 3 percent to a two-month low.
The turmoil spread to Asian stocks on Wednesday following a steep slide in U.S. shares overnight.
The euro fell to a one-year low of $1.2936 and Banco Santander and BBVA, often seen as a proxy for Spain, lost 2.1 and 2.8 percent respectively in early Wednesday trading, while the cost of insuring Spanish and Portuguese debt against default rose further.
Seeking to calm markets, European Monetary Affairs Commissioner Olli Rehn said Spain did not need an aid mechanism of the kind used for Greece and he was not going to propose one.
He said deficit levels of all EU states were "worryingly high." "In order to safeguard the economic recovery, which is still rather modest and somewhat fragile, it's absolutely essential to contain the brushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," Rehn said.
Despite official denials, many economists are convinced that Greece will have to restructure its debt, making private investors take a share of the pain.
"What we are seeing today is very classical financial contagion effect," said Sebastian Barbe, head of emerging markets strategy at Credit Agricole, Hong Kong.
"This is because the market is still pricing in some more sovereign crisis problems out of Europe, and for the short term it can continue for some more time." Spain's prime minister, Jose Luis Rodriguez Zapatero, was forced to dismiss a market rumor on Tuesday that his country would soon ask for 280 billion euros in aid, and his deputy said the government was confident it could bring down the deficit by 2013.
Spain generates close to 12 percent of the euro zone's output, almost five times more than Greece.
Concern that Greece's Socialist government will be unable to implement all the deficit-cutting measures agreed with the EU and IMF because of possible social unrest is one of the drivers of the euro zone turmoil.
Analysts were watching Wednesday's planned mass demonstration in Athens for pointers to the degree of mobilization of Greece's powerful trade unions.
So far, demonstrations have been limited to tens of thousands but anger is mounting, with opinion polls showing ordinary Greeks believe they are paying the price of the crisis while tax evasion and corruption go unpunished.
Prime Minister George Papandreou submitted an austerity bill to parliament on Tuesday which foresees 30 billion euros in new savings through deep cuts in wages and pensions and a hike in value-added tax (VAT).
"With our strike today we are continuing our fight against harsh and unfair measures that hit workers, pensioners and the unemployed," Yannios Panagopoulos, president of private sector union GSEE, told Reuters.
On Tuesday, police fired teargas at a small group that pelted them with rocks and bottles outside parliament.
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