Greek PM summoned by Sarkozy, Merkel as bailout referendum tumbles markets

Papandreou has been summoned for an urgent meeting in Cannes later today on the fringe of a G20 Summit, and will face a furious French president Nicholas Sarkozy and German chancellor Angela Merkel.

The proposed referendum by Papandreou risks destabilising the entire eurozone and the European Union.

The news announced on Monday night, sent European markets into record negative territory, while the euro slumped. Markets in Asia and the USA also felt the after effects.

In another development, the risks of a failed referendum in Greece, have boomeranged on Italy which faces the prospect of contagion, with the Milan stock exchange suffering a heavy blow yesterday.

Italy's Prime Minister Silvio Berlusconi summoned his Cabinet for an emergency meeting last night, while the President of the Republic Giorgio Napolitano stepped in to guarantee that the Presidency was to oversee the implementation of economic reforms which were agreed in Brussels last week.

The Greek cabinet backed Papandreou's shock call for a referendum on the European economic rescue plan despite heavy falls on the financial markets.

After a lengthy meeting, Greek government spokesman Elias Mossialos said: "The referendum will take place as soon as possible, right after the basics of the bailout deal are formulated."

Some ministers leaving the seven-hour talks said they had expressed reservations about the referendum but decided to support the government ahead of a key confidence vote expected in parliament on Friday.

Papandreou told his ministers that putting the issue to the Greek people was the only way to safeguard the proposed debt-and-loan deal.

"We will not implement any programme by force, but only with the consent of the Greek people," he said. 

"This is our democratic tradition and we demand that it is also respected abroad."

A referendum, he said, "will be a clear mandate, and a clear message within and outside of Greece, about our European course and our participation in the euro," he said, according to a text of his speech to the meeting issued by his office.

Papandreou has been summoned to emergency talks on the bailout on Wednesday before a G20 summit in Cannes.

French President Nicholas Sarkozy, who will host the meeting in Cannes, said news of the referendum had "surprised all of Europe".

"Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts."

Greece's general price index plunged to close down 6.92% the day after Papandreou's announcement.

In Germany the Dax index, the major stock market average, lost 5%, while the French stock market closed down 5.4%, the Italian 6.7% and London 2.2%.

Constantine Michalos, the head of the Athens Chamber of Commerce, said Papandreou's referendum call was a "suicidal move" that had sent the markets "completely in the doldrums".

"He came out of the blue with this referendum idea, which he hadn't communicated even to his closest cabinet ministers... or with the major leaders of the European Union," he said.

"The euro has been threatened. And of course the credibility factor concerning Greece - which has been a problematic issue for months now as a result of the debt crisis - has worsened even more."

The debt deal agreed by European leaders last Thursday in Brussels would see banks accept a 50% writedown - higher than the 40% they had originally offered.

It was also agreed that the €440 billion bailout fund will be increased to around €1trn.