Greece began preparing on Friday for its second election in just six weeks, with increasing alarm over the crisis in the eurozone after the savage downgrading of banks in Spain.
European stock markets opened lower after heavy losses in Asia overnight, while the euro also lost ground, slipping to $1.2657 from $1.2693 in New York.
World leaders meet US President Barack Obama later Friday, with Greece top of the agenda at a two-day Camp David summit as the debate rages over the best way forward -- whether to go for growth or more austerity.
Greek voters dramatically rejected painful spending cuts in the deadlocked May 6 poll and are expected to do so again in the June 17 election, raising concerns about the fate of the latest EU-IMF bailout package worth 240 billion euros ($300 billion).
Fitch Ratings agency cited the prospect of another inconclusive election and Greece being forced out of the eurozone as it cut its rating on the country's debt to "CCC" or vulnerable to default.
"In the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable," the rating agency warned.
Many EU leaders have insisted that there can be no change to the terms of the bailout but have also began to allow some room for movement, especially as new French President Francois Hollande won power this month on a growth pledge.
The eurozone's woes were exacerbated on Thursday when Moody's downgraded 16 Spanish banks and figures showed that the country had slid into recession.
European parliament chief Martin Schulz warned Friday that any Greek exit from the eurozone could see its economy collapse in days, with untold consequences.
"Many people believe that it would be the end of a negative cycle but for me it would be the beginning of an even more negative cycle," Schulz told German radio from Athens where he is due to meet President Carolos Papoulias.
A caretaker government took office on Thursday after the May 6 vote left Greece in limbo but the June 17 poll offers no guarantee it will produce a viable government able to implement the divisive EU-IMF bailout.
With no immediate end in sight to the uncertainties in Greece, which has needed two international rescue deals, the pressure has mounted amid damaging speculation of bank runs and Athens' possible departure from the eurozone.
Since there is no provision for an orderly exit from the 17-nation currency bloc, the prospect is for chaos if Athens cannot stick to the tough terms of the latest bailout deal.
On Thursday, Panagiotis Pikrammenos, 67, the head of Greece's top administrative court, put together a caretaker government of mainly prominent university professors, plus a retired general and a diplomat.
"We must not forget that all of Europe is watching us," Pikrammenos said, adding: "We must all work to steer the country to a safe harbour."
He told the cabinet there would be no pay for its month's work and ministers should set an example of frugality in hard times.
"The country must honour the obligations it has undertaken. It cannot abrogate its obligations without reason and cause a major crisis," he added.
But opinion polls show the radical leftist Syriza party, which wants to drop the EU-IMF deal and its austerity measures, coming first in the June election with 24.5 percent of the vote.
Spain was hit Thursday by rumours of a run on deposits at its fourth largest bank, Bankia, and then the dramatic Moody's banks downgrade, sending global financial markets sharply lower Friday.
Markets were also rattled after Papoulias said 700 million euros had been withdrawn from Greek banks on Monday, but a banking source Thursday downplayed the move, saying there had been inflows of 1.0 billion euros in March and a similar amount was estimated for April.
The source also said that 18 billion euros in funds due under the bailout for the recapitalisation of Greek banks was expected by Tuesday or Wednesday.
The EU and the International Monetary Fund have warned that no new funds will be released from the latest bailout if progress on pledged reforms and tough austerity measures falters.
However European leaders appeared to move Thursday towards resolving an emerging split over how to deal with the crisis, agreeing in a videoconference that both growth and cutting budget deficits are needed.