Athens stock exchange dropped 13% and investors registered their fears as the yield on 10-year debt jumped to 7.86%

The Athens stock market plunged nearly 13% on Tuesday, its biggest one-day fall since December 1987, after the Greek prime minister’s shock decision to call early presidential elections.

Markets feared that the high-stakes gamble by Antonis Samaras on Monday night could trigger early elections and pave the way to the stridently anti-austerity Syriza party assuming power. Voting for a new head of state will begin next week.

Other financial markets took the news badly: the FTSE 100 was down 142 points, more than 2%, at 6529, its lowest level since the start of November; Germany’s Dax dropped 2.1%; France’s Cac closed down 2.4%; and the Dow Jones Industrial Average was 158 points or 0.88% lower by the time London closed. Banking shares were under pressure on fears that a new round of the eurozone debt crisis would prove another strain on their balance sheets.

The prospect of the eurozone’s weakest member being plunged into political tumult saw yields on Greece’s 10-yield bonds rise to 7.86%, effectively shutting the debt-burdened country out of capital markets just when it was beginning to show the first signs of economic progress after six gruelling years of recession.

Samaras said the election, initially due to take place in February, had become imperative to expunge the “clouds of political uncertainty” that had started to gather over Greece.

“The presidential election had become a pretext to force early elections,” the conservative leader told the nation on Tuesday in an address nominating the veteran politician Stavros Dimas, a former EU commissioner, for the post. “As was its duty, the government decided to remove this uncertainty and to fully restore political stability by expediting the election for a president of the republic.”

With the Greek constitution demanding that snap polls be held if parliament fails to elect a head of state, the survival of the ruling coalition now rests on the result. The fragile two-party alliance led by Samaras has a slim majority with 155 seats in the 300-member house and has yet to secure the 180 ballots required to ensure that Dimas is voted in when a third round takes place on December 29.

Frenzied horse-trading is expected in the runup to the first round of voting next Wednesday as the government attempts to win over vacillating MPs.

There is concern that general elections could resurrect the crisis that has haunted Greece. Athens, which was given a two-month extension of its bailout programme by European funders hours before the election announcement was made, has still not begun negotiating a precautionary credit line which is seen as vital by lenders if the country is to go it alone.

Syriza, tipped in polls to emerge the winner of national elections, has ruled out discussing further austerity in return for such support.

The radical leftists led by Alexis Tsipras, who have seen their popularity surge on the back of anti-bailout rhetoric, have instead called for slashed wages and pensions to be reinstated and for the international community to write off a debt load that, at 180% of GDP, is by far the biggest in Europe.

Even if the leftists do not gain an outright majority – the most likely scenario – the possibility of the party being the central plank of a future government would plunge Greece into nerve-wracking uncertainty and reignite speculation of the country ultimately being forced to leave the eurozone.

“Greece in the next six weeks may prove to be more important for global markets than Russia/Ukraine was in 2014,” Charles Robertson, chief economist at Renassiance Capital told the Financial Times. “A possible Syriza election victory may force the eurozone to choose between a fiscal union [a debt write-off for Greece] or the first euro exit.”

Investors were also unsettled on Tuesday by news from China that its central bank had placed restrictions on lower rated corporate bonds, tightening credit conditions just weeks after loosening them by cutting interest rates.

The move came shortly after disappointing Chinese trade data for November, including a surprise 6.7% fall in imports, rekindled fears of a slowdown in the country’s economy.

Meanwhile, Japan’s recession was reported to be deeper than previously expected. Credit rating agency Fitch took the first step to downgrading the country, putting Japan’s A+ rating on negative watch, citing Japan’s “high and rising” government debt ratio, and the absence of a plan to address it.

There were also continuing concerns about the weak oil price indicating a fall in global demand, despite a marginal improvement in the oil price – Brent crude added almost 1% to $66.80 ($32) a barrel.

Gold gained ground, up nearly $27 an ounce to $12.30, as investors sought safety amid the market volatility.

In the UK, the market was also undermined by a surprise profit warning from Tesco, which left the whole supermarket sector lower.