Image copyright Reuters Image caption The ECB suspension followed meetings with Greek Finance Minister Yanis Varoufakis

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.

Market falls

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.

According to the Greek newspaper Kathimerini, the interest rate is 1.55%, compared with 0.05% on regular ECB financing.

Earlier on Wednesday, Greek Finance Minister Yanis Varoufakis, met the ECB's president Mario Draghi to discuss the country's bailout.

Analysts said the ECB statement was a sign the meeting had not been a success.

"This is clearly the ECB signalling to the Greek government: You're going to have to talk to [international lenders] the troika and get a deal,'' Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics told the Associated Press.

"Otherwise, really bad things are going to happen.''

The euro fell sharply against the dollar on the news, dropping more than a cent to $1.1331.

On Thursday, Mr Varoufakis is due to meet his German counterpart, Wolfgang Schaeuble, one of the toughest critics of the new Greek government.

Analysis

Image copyright Getty Images Image caption Greece's economy has shrunk by 25% since the start of the eurozone crisis

Andrew Walker, World Service economics correspondent

The European Central Bank's decision reflects the uncertainty about whether Greece will reach an agreement on its bailout programme with the rest of the Eurozone.

Greek government bonds have such a poor credit rating that the ECB only accepts them as collateral if the Government has such a support programme in place.

The immediate direct impact on the Greek banks is likely to be relatively moderate. They can use other assets to borrow from the ECB and they can turn to the national central bank - but at a higher interest rate.

The move does however add to the pressure on the Greek government to do a deal.

Over the next few weeks the banks in Greece could face further stress.

Already, significant amounts have been withdrawn from accounts, and there is a possibility of further restrictions on their access to central bank funds.