Greek announcement of referendum thwarts stock gains

Europe has been plunged back into political and economic uncertainty after a few days of relative calm. Greece has sent shock waves across Europe by calling a referendum on the latest bailout deal.

It means there is a legitimate chance that the program to save the euro currency - agreed to much fanfare in Brussels last week - could be sunk if the Greek people vote against accepting the terms of the bailout.

Greece is known as the birthplace of democracy.

And it is the Greek people who will now decide their own economic fate, which will have consequences for the entire eurozone.

Politicians in Athens and beyond were shocked when Prime Minister George Papendreou declared a referendum on a new EU bailout.

A confidence vote in the Socialist government will also be held by Parliament this Friday.

"This is the highest form of democracy, it is a great moment of patriotism for the citizens to decide, so let us then give the final word to the people and let the citizens decide," said Papendreou.

Protests against austerity measures and waves of strikes have crippled Greek cities in recent months.

The latest EU aid package would see further public sector pay and pension cuts and tax rises, designed to reduce Greek debt.

A 'no' vote in the referendum is a real potentiality, as opinion polls suggest over half of Greeks disapprove.

Political journalist Kostas Raptis says Greeks are increasingly turning against the European Union.

"It's a very imbalanced relationship economically. And now politically as well. I mean, this sort of imbalance is now translated into the political field, with big eurozone economies dictating to the periphery countries what to do and how."

That has rekindled tensions with Germany, which has been driving EU demands for more Greek austerity.

Protesters waved anti-German flags and banners at a national holiday in Greece last week to commemorate World War II.

Alleged Nazi war crimes had been re-enacted at previous demonstrations.

"Deep down some World War II animosities still survive, I suspect," said Raptis. "Many Greeks complain about the damages inflicted on our country during the war and about the need for proper German reparations."

In public, European leaders put on a show of unity. But relations are likely to be strained by the referendum.

"If it goes well, he of course has the support of the Greek people," said Joerg Rocholl, President of the European School of Management in Berlin. "If not, it could lead to a situation where Greece can no longer remain a member of the euro zone".

Analysts say that if Greeks vote 'no', there are no obvious alternatives other than for Greece to default or leave the euro.