The euro touched a fresh four-month low of $1.2883, Spanish and Italian bond yields rose, while the FTSE Eurofirst .FTEU3 index of top European shares hit its lowest level for the year at 983.95 points, down over 1 percent.

The probability of Greece leaving the 17-member currency bloc increased markedly after political leaders in Athens failed to form a government on Tuesday, forcing another round of elections. Opinion polls show this is likely to be won by leftist parties opposed to the country's bailout deal. (nL5E8GG0S1).

In response, markets have moved to price in an acceptance that Greece will leave the single currency, but remain very uncertain about what that means for the rest of the region.

"The idea that you can contain the spillover, the contagion, into the likes of Portugal, the likes of Spain, I just don't see that as being feasible," said James Ashley, senior European economist at RBC Capital Markets.

As a result, yields on peripheral euro zone sovereign bonds have risen sharply as investors withdraw to safe havens like German government debt, although market participants say many investors were choosing to simply stay on the sidelines.

The benchmark 10-year Spanish bond yield rose four basis points to 6.41 percent after big gains on Tuesday. The Italian equivalent was up a similar amount at 6.07 percent. Portugal's 10-year bond gained 22 basis points to 11.67 percent.

The yield spread of emerging sovereign bonds over safer U.S. Treasuries also widened to 3-1/2-month highs of 389 basis points.

"The re-weighted probability of Greece leaving EMU has led to a sharp widening of government bond spreads, suggesting that long-term capital is leaving the periphery of Europe," Morgan Stanley said in a note to clients.

BANK WITHDRAWALS

There were also signs in Athens that the prospect of a rapid devaluation of any new currency if the country leaves the euro was concerning ordinary Greeks.

Central bank head George Provopoulos told political leaders savers had withdrawn at least 700 million euros ($894 million) from the nation's banks on Monday.

The euro extended its recent falls on the mounting risk of a Greek exit, falling to a four-month low against the U.S. dollar of $1.2683 and a three-month trough versus the yen.

The dollar .DXY meanwhile rose to its highest in four months against a basket of currencies.

European shares were hit by a broad-based sell-off as the Greek concerns sapped investor appetite for risk, with the FTSEurofirst 300 index .FTEU3 down 0.9 percent to 989.27 having dropped 0.7 percent on Tuesday.

Spain's IBEX 35 .IBEX fell 1.8 percent, while Italy's FTSE MIB .FTMIB weakened by 1.7 percent.

"Still we're in this risk-off correction phase and at this moment I do not really see what's going to take us out of it, so I would continue to be very cautious," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said.

Emerging market stocks as measured by the MSCIEF index .MSCIEF plunged 2.75 percent and the index looked set to erase all its year-to-date gains on its way to its biggest one-day loss in six months.

Weakness in Asian share markets sparked by the Greek crisis also saw MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fall 3.3 percent to a new four-month low.

MSCI's global equity index .MIWD00000PUS was down 0.9 percent to 305.02 and is now up less than 2 percent for the year to date.

Brent crude oil fell to $110.82 cents a barrel and gold extended its losses to be down $13.34 at $1,530.76 an ounce, its weakest level since late December.

(Editing by David Holmes)

• A Permanent Economic Emergency