The European Central Bank (ECB) has toughened its stance with Greece by restricting financing to the country’s banks, sending shares falling.
In a statement, the central bank said it would no longer accept Greek government bonds as collateral for lending money to commercial banks.
The move makes access to cash more expensive for Greece’s banks.
In Athens, the stock market fell more than 6%, while bank stocks tumbled as much as 16%.
The ECB said that its move was because it could not assume a “successful” deal on Greece’s €240bn (£179bn) bailout.
Shares in Greek banks fell sharply, with Alpha Bank shares were down 10%, Eurobank shares down 15%, and National Bank of Greece 12.3% lower. The wider Athens stock market initially fell more 10% before recovering slightly.
Italian and Spanish stock markets were also trading down about 1% by mid-morning.
The yield, or interest rate, on Greek bonds rose more than two percentage points as investors demanded higher returns on the country’s debt.
The newly-elected Greek government is in talks with international creditors over the terms of its bailout, which it thinks are too harsh.
The Greek finance ministry said the ECB’s decision, which is due to come into effect on 11 February, would have “no adverse impact” on the country’s financial industry.
It said the sector was “fully protected”, with other options still available.
‘Get a deal’
Banks can still access funding through the Emergency Liquidity Assistance (ELA) programme, run by Greece’s central bank, and at a much higher cost to the banks.