Euro zone policymakers and the head of the IMF warned of looming financial contagion on Wednesday unless a euro zone debt crisis is stopped in Greece, as nervous investors fled to the safe haven of the dollar.
Greek public and private sector workers shut down airports, tourist sites and public services in a general strike and tens of thousands demonstrated in Athens against harsher austerity, accepted by the government as the price for a 110 billion euro ($146.5 billion) EU/IMF bailout on Sunday.
German Chancellor Angela Merkel told parliament Europe's fate was at stake in the most serious crisis in the single currency's history, and other euro zone countries could be hit unless the rescue for Greece succeeds.
European Monetary Affairs Commissioner Olli Rehn said it was vital to stop the crisis spreading beyond Greece.
It's absolutely essential to contain the bushfire 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, he told a news conference.
Anxiety over a widening of the euro zone debt crisis sent stocks tumbling worldwide, and the euro hit 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. Lisbon had to pay more than four times its previous yield to sell six-month treasury bills at auction on Wednesday.
Merkel, whose foot-dragging many analysts have blamed for aggravating the Greek 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 aid, a chain reaction threatened to destabilize the European and international financial system, she said.
European Central Bank governing council heavyweight Axel Weber gave a similar warning in a statement to parliamentarians, saying that a Greek default would pose a substantial risk to the stability of European monetary union and the financial system.
There is a threat of serious contagion effects for other euro zone countries and increasing negative feedback effects for capital markets, he said.
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.
He criticized the 15 other euro zone governments for charging Greece a 5 percent interest rate on the loans, largely at Germany's insistence, saying they should have lent at the same rate as the IMF, which is more than half a point less.
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, Rehn said Spain did not need an aid mechanism of the kind created for Greece and he was not going to propose one. But he also said the deficit levels of all EU states were worryingly high.
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.
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 potential social unrest is one of the drivers of the euro zone turmoil.
Prime Minister George Papandreou presented 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 sales tax. But the conservative opposition vowed to vote against it, dooming hopes of a political consensus.
Analysts were watching Wednesday's protest 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.
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.
Police fired teargas at a group of about 50 protesters who tried to storm the parliament building on Wednesday.
(Additional reporting by Lefteris Papadimas in Athens, Jan Strupczewski in Brussels and Carolyn Cohn in London; writing by Paul Taylor, editing by Peter Millership)