Plans for fresh elections in crisis-torn Greece derailed markets as relief that the eurozone had dodged recession proved short-lived.
Greek president Karolos Papoulias admitted last-ditch talks to form a coalition had failed and a caretaker government will be formed on Wednesday ahead of another election, expected to be held in the middle of June.
The new poll is thought likely to see an anti-austerity radical left wing group increase its share of the vote, and could lead to Greece defaulting on its debts and being expelled from the eurozone.
The fresh uncertainty over Greece saw the FTSE 100 Index fall 0.5% after a 2% fall yesterday wiped £28.5 billion from its value, the Press Association reported.
It had been up earlier in the session after figures showed that better than expected 0.5% growth in Germany had helped the eurozone avoid recession.
The region's 17 economies failed to grow in the first quarter of 2012, although this was slightly better than the predicted 0.2% decline.
Markets in Germany and France were down 0.6% and 0.3% respectively, although the Dow Jones Industrial Average in the US made slight gains.
Traders say the next election will effectively be a referendum on whether to stay in the eurozone and stomach more painful austerity measures.
The austerity measures have been demanded by the EU and IMF in return for two bailouts. But Greece is in the fifth year of recession and more than half the voters chose anti-austerity parties in the last election.
It is thought that Alexis Tsipras' Radical Left Coalition (Syriza), which is opposed to austerity, could win a second ballot after a strong performance in recent polls.
He hopes to keep Greece in the eurozone despite ripping up the harsh terms of the bailout agreement, but European leaders have warned they will cut off Greece's funding if it reneges on the deal.
Chris Beauchamp, market analyst at IG Index, said: "The reality now is that there will be elections in mid-June, and at present the anti-bailout, left-wing Syriza party is poised to win a majority.
"If it does, it is pledged to abandon most of the austerity measures, which would result in the halting of bailout payments and likely result in the exit of Greece from the eurozone.
"After two years, this event now seems inevitable, barring some major turnaround in the Greek political climate."
The fears over Greece have seen the pound hit three year highs against euro of 1.25 in recent days, which is good news for holiday makers preparing to hit the continent.
However, the euro staged a slight recovery today, boosted by the stronger growth in Germany.
Kathleen Brooks, research director at Forex.com, said the German economy is "single-handedly propping up the eurozone".
She added: "Today's data highlights the two-speed economy in the region, which makes it even harder for markets to value the euro.
"The troubles in the periphery and in Greece in particular, could cause the end of the eurozone, so how do you price in such contrasting situations - strong German growth on the one hand and disaster on the other?"
While Germany's growth was much stronger than expected, other economies - Ireland, Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Slovenia - are in recession.
The FTSE 100 Index closed down 27.9 points at 5437.6. The Dax in Germany and the Cac-40 in France were down more than 0.5% but the Dow Jones Industrial Average in the US was slightly higher as the London market closed.Suggest a correction