GERMAN Chancellor Angela Merkel on Monday warned Athens to stick to the reform plans and budget targets agreed under its international bail-out plan as financial markets and European Union (EU) policy makers grappled with the prospect of further instability in Greece and a new socialist president in France.

The two main Greek parties suffered a collapse in support in Sunday's election, plunging the country into political turmoil and raising doubt about its commitment to its rescue programme.

The euro fell and banks came under pressure in morning trading on equity markets on Monday as investors digested the implications of the Greek vote and the prospect of a French-led challenge to Ms Merkel's euro-zone austerity drive. But the euro later recovered from falling to its lowest level since January and European equities turned positive.

On Monday night, Greek conservatives said they had failed to form a government, paving the way for anti-austerity leftists to try to cobble together a coalition.

The development underscored the precarious situation of the country in its fifth year of recession, and which needs bail-out funds to stay afloat.

Conceding the Greek electoral result was "not uncomplicated", Ms Merkel said: "It is of utmost importance that the programmes that we agreed on with Greece continue to be implemented. The process is a difficult one, but despite that it should go on."

The European Commission, one of the "troika" of authorities managing Greece's bail-out, made clear it was not willing to reopen the ?174bn programme and called on any new Greek government to meet the commitments already made to international lenders.

"We think Greece must remain a member of the euro . but everybody must carry their responsibility here," Amadeu Altafaj-Tardio, the commission's economic spokesman, said on Monday. "Solidarity is a two-way street."

Ms Merkel played down the prospect of a rift with Francois Hollande, the socialist president-elect of France, who has refused to endorse the EU's German-inspired fiscal discipline treaty unless it is supplemented by new growth-promoting measures.

Mr Hollande will take office on May 15 and is expected to travel to Berlin the following day to try to hammer out a compromise with the German chancellor.

Ms Merkel said he would be "received in Germany with open arms and we'll work together".

US President Barack Obama has invited Mr Hollande for bilateral talks in Washington this month before members of the Nato alliance meet for a summit.

Markets appeared to be more unsettled by the turmoil in Greece, where New Democracy's Antonis Samaras said last night he had failed to form a government with the Panhellenic Socialist Movement (Pasok) of Evangelos Venizelos, and persuade former legislators who set up Independent Greeks, a right-wing splinter group, to come back on board.

His failure means it will be the turn of Alexis Tsipras, the firebrand leftist who leads Syriza and who beat Pasok into third place in Sunday's election.

Analysts said rising spreads between debt of the peripheral euro-zone nations and those of the core could be crucial in determining the euro's value over the coming days.

"Should peripheral spreads rise in response to the election outcomes, it would likely signal deeper vulnerability for the euro," analysts at Citigroup said.

They predicted the European Central Bank would have to embark on another round of its longer-term refinancing operation as early as next month.

Panayotis Petrakis, an economics professor at Athens University, expressed hope, however, that new French president-elect Mr Hollande "would prevent Europe treating us too harshly".

FINANCIAL TIMES, REUTERS