Portugal's president started to consult leaders of political parties on Friday as he weighs whether to call a snap election after the Socialist prime minister resigned.
The crisis could force Portugal to request a bailout from the European Union and International Monetary Fund after months of desperate struggle to avoid one, becoming the third euro zone country to seek aid, after Greece and Ireland.
The crisis, which was sparked by parliament's rejection on Wednesday of government austerity measures, prompted Standard & Poor's and Fitch to downgrade Portugal's credit rating.
S&P's two-notch rating cut, which came with a warning it could downgrade the debt-laden state again as soon as next week depending on the final shape of the euro zone bailout fund, hit the euro, although the currency later recovered.
A sell-off in Portuguese bonds pushed the yield on its 10-year benchmark above 8 percent, a euro lifetime high, while the spread between Portuguese debt and safer German Bunds widened 13 basis points to 474 bps. The cost of insuring its debt against default also rose.
Prime Minister Jose Socrates was attending a summit of European Union leaders in Brussels on Friday. Portugal's political crisis dominated the summit's start on Thursday, further complicating efforts to solve the euro zone's debt problems.
President Anibal Cavaco Silva started meeting political parties at 0930 GMT, meeting with the small Green Party first. Only late in the afternoon will he meet the opposition center-right Social Democrats and the Socialists.
Socrates submitted his resignation to the president on Wednesday after parliament rejected austerity measures proposed by his minority Socialist government to try to avert a bailout.
The president first has to hear the six parties represented in parliament to see if there is a chance of a coalition cabinet being formed. But analysts consider such an option unlikely after the main opposition Social Democrats (PSD), who lead in opinion polls, said they wanted an election.
The most likely scenario is that no coalition agreement is reached, Eurasia Group analyst Antonio Barroso wrote in a note, saying the likelihood of a snap election was around 70 percent.
Polarization among the parties is high and both Socrates and the PSD leader Pedro Passos Coelho have declared that they would rather go to early elections, he said.
An opinion poll published on Friday showed that the Social Democrats would win an absolute majority if elections were held today.
Cavaco Silva's next move would be to summon his advisory body, known as the Council of State, after which he can dissolve parliament and call an election, which under the constitution can be held in late May at the earliest.
A final decision by Cavaco Silva is unlikely to come on Friday.
Socrates will retain full powers until Cavaco Silva accepts his resignation, which analysts say could happen after the Council of State meeting, possibly over the weekend. He is likely to stay on as a caretaker premier with limited powers until a new government is formed after an election.
The fall of the government has left Portugal in limbo, with legal experts guessing whether a caretaker government could ask for an international rescue if needed. Portugal has a large volume of debt maturing in the next few months.
Socrates' government said it will continue to resist a bailout as it would have bad consequences for the economy and mean more sacrifice for the Portuguese.
Most economists agree Lisbon should be able to repay around 4.3 billion euros ($6.05 billion) of bonds coming due in April, but 4.9 billion euros due in June may trigger a request for aid.
(Additional reporting by Axel Bugge; Editing by Catherine Evans)