The euro has hit a fresh four-month low against the dollar as political uncertainty in Greece fuels speculation it could be forced to leave the euro.

The euro fell as much as 0.7% to $1.2681 early on Wednesday, but had recovered some ground by mid-afternoon.

Against the pound, the euro slipped to 79.50 pence.

Share indexes in Frankfurt and London fell about 1% in morning trading, but they recovered to be in positive territory by the afternoon.

'Cannot re-negotiate'

Greek politicians have failed to form a coalition, meaning the country will go the polls again next month.

In elections earlier this month, the majority of Greeks voted against those parties backing the drastic austerity measures that had been agreed with the European Union (EU).

Some Greek politicians have talked about renegotiating the terms of the massive bailout by the EU and the International Monetary Fund to relieve the burden on the country's economy, which has been in recession for four years.

But German Finance Minister Wolfgang Schaeuble said on Wednesday there was no question of changing the terms of the loan.

"This is an aid programme that was prepared down to the last detail, we cannot re-negotiate it," he said.

What policymakers and market players are worried about right now is if foreign investors see a Greek deposit crisis as a signal to rush for the exits in Italy and Spain.

Analysts and some politicians are now openly discussing the possibility of Greece leaving the euro.

Earlier on Wednesday, Tokyo's Nikkei index closed down more than 1%, while Hong Kong's Hang Seng and South Korea's Kospi lost about 3%.

The oil price also fell. Brent crude dropped 73 cents to $111.51 a barrel, while US light crude fell $1.17 to $92.81 a barrel.

Separately, figures released on Wednesday showed that the eurozone inflation rate fell to 2.6% in April, down from 2.7% in March. The European Central Bank's target rate for inflation is 2%.

Different views

There are concerns that if Greece sets a precedent by leaving the euro, other countries may follow suit.

As a result, the interest rate, or yield, on Spanish government bonds traded on the secondary market rose to 6.44% from 6.32%, while those on Italian bonds rose to almost 6%.

This indicates investors are becoming increasingly nervous about the ability of these countries to repay their debts.

Austerity measures introduced across Europe are designed to reduce debt levels that have risen significantly since in the financial crisis of 2008.

However, as anaemic growth and high unemployment grip the eurozone, an increasing number of commentators and politicians are questioning whether austerity alone is the best way out of the crisis.

Leading the calls to focus on growth is new French President Francois Hollande. On Tuesday evening, he held talks with German Chancellor Angela Merkel, who insists that austerity is the best way to cut debt levels.

Despite their differences of opinion, the two leaders vowed to work together to resolve the crisis.