European officials are playing a dangerous game of chicken with Greece.

In an apparent signal to Greek voters, the head of the World Bank warned Thursday that if Athens were to depart from the common currency, Spain and Italy could well be the next dominoes to fall in Europe’s widening financial crisis.

After ousting the Athens government that agreed to deeper spending cuts in return for a financial lifeline, voters return to the polls in June after the winning parties failed to form a new government. Apparently hoping to convince Greek voters to return a pro-austerity government to power, European officials are now openly discussing the likely dire consequences if they don’t.

But the comments may have only served to heighten fears of a wider breakup of the eurozone should Greece exit the monetary union.    

Investors backed away further from Spain's government debt Thursday, raising the country’s borrowing costs to levels that sparked the Greek debt crisis in the first place.

Bond buyers were also reacting to fresh economic data showing that Spain’s economy is beginning to shrink, which makes its existing debt load even harder to carry.

The growing crisis also has caused growing nervousness among U.S. investors. Since the inconclusive Greek vote May 6, the Dow Jones industrial average has fallen in seven out of eight sessions and was down again Thursday. U.S. banking giant JPMorgan Chase send another ripple of worries through the market May 10 when it said it had lost at least $2 billion in a failed attempt to hedge against European volatility.

The recession is also putting more pressure on Spain’s banks, which have been saddled with bad mortgages as the country faces a deepening housing bust. Last week, the government took over Bankia, which holds 10 percent of the banking system’s deposits, after it reportedly suffered an large outflow of deposits.

Aris Messinis / AFP - Getty Images

Greek Archbishop Ieronimos blesses the new caretaker prime minister, Panagiotis Pikrammenos, right, in Athens Thursday. Greeks will return to the polls next month after an inconclusive vote sent jitters across the eurozone.

The news follows reports that depositors pulled another $900 million out of Greek banks on Wednesday, extending a capital flight that could bring down Greece’s banking system. The fear is that those worries spread among depositors in other countries like Spain where the banking system is already under pressure.

Until very recently, European officials were loath to even discuss the idea of Greece’s departure from the compact binding 17 nations with a common currency. For one thing, the treaty that created the euro has no provision for a member country to abandon the currency or for its expulsion by the rest of the monetary union.

But central bankers and officials of agencies like the World Bank and International Monetary Fund have begun to think – and discuss – the unthinkable. IMF chief Christine Lagarde warned this week that Greek's departure from the euro would be “quite messy” and  "extremely expensive."

Analysts who are looking at the potential impact say the losses and economic pain would be widely felt.

Replacing the euro with a new, devalued currency would wipe out much of the remaining assets on Greek bank books. Europe’s central bankers have already pulled back some forms of funding for Greek banks that have been hit hardest by withdrawals. Hundreds of billions worth of additional borrowing by Greek households and businesses would be in legal limbo.

Any new currency – or a return to the pre-euro drachma – would be massively devalued, by some estimates as much as half the value of a euro. That would help Greece’s economy eventually get back on a growth path because it would make its products and services cheaper for buyers spending dollars and euros. A week’s vacation in Crete would cost half the price of a comparable trip to Sardinia.

But Greek households and businesses would bear the immediate pain. Imported goods and commodities like oil would suddenly cost twice as much. Households and businesses making good on outstanding loans written in euros would see repayment double in local currency terms.

European officials who engineered the costly plan to “save” Greece -- led by France and Germany -- would also feel the pain. Much or all of the more than $200 billion in loans already extended to the Greek government by the IMF, European Central Bank and Europe’s private banks would be at risk. That would mean explaining to French and German taxpayers what went wrong with the grand plan.

It would also raise the political costs of extending further bailouts to weaker, debt-burdened countries including Spain and Italy. As Greece demonstrates that a once-unthinkable exit from the euro is now possible, other countries may follow. If investors continued to shun Spanish and Italian government bonds and depositors flee their banks, the choice facing Europe grows more stark.

Worries about the fragmentation of Europe’s monetary union have already sapped business and consumer confidence and brought the region’s economy to a dead stop. Government austerity measures imposed on weaker economies are driving them deeper into recession.

As that recession spreads, the pain of Greece’s departure from the euro would be felt even more broadly, according to Michel Juvet, an economist at Bordier, a Swiss bank.

“At the same time we have China, which is slowing down very, very fast, we have the U.S. economy, which is losing momentum, and we have this global slowdown, “ he said. “All economies are so connected that when one country or one big zone is suffering, the others are suffering as well. This is globalization.”

Others see the crisis in starker terms.

“This is phase two of the global financial crisis," said R. Seetharaman, CEO of Doha Bank in Qatar. "That’s the reality."

NEW YORK — U.S. stocks opened lower on Monday as election results in France and Greece stirred up new uncertainties about how the region would tackle its ongoing debt crisis. 

Moments after the opening bell, the Dow Jones industrial average dropped 41.44 points, or 0.32 percent, to 12,996.83. The Standard & Poor's 500 Index lost 4.40 points, or 0.32 percent, to 1,364.70. The Nasdaq Composite Index fell 14.13 points, or 0.48 percent, to 2,942.21. 

Greeks voted out ruling parties in elections on Sunday, dealing a blow to the fragile political consensus that had kept Europe's currency bloc intact through more than two years of crisis. The country's banking index  slid 14 percent. 

"The knee-jerk reaction was a little strong, but there's chaos in Greece, and being against the deal that was already agreed upon is almost like progress being set back a year and a half," said Scott Freeze, president of StreetOne Financial in Huntington Valleym, Penn.  

"The big concern is that this sets us up for substantial financial losses." 

Worries over the debt crisis have helped to drive weakness in U.S. equities in recent months, with investors concerned about its effects on global growth and corporate profits. 

Bearish U.S. economic data, most notably the payrolls report, have exacerbated fears growth may be stalling. 

In France, Socialist candidate Francois Hollande won the presidency over incumbent Nicolas Sarkozy, raising pressure on Germany to pursue a more growth-oriented approach to the regional crisis. 

The U.S. earnings season is winding down, and of the 415 S&P 500 companies reporting as of Friday morning, 67.5 percent exceeded estimates, according to Thomson Reuters data. In contrast, more than 80 percent beat expectations at the start of the season. 

With last week's decline, the S&P 500's 3.5 percent pop from an April closing low to a May closing high has largely been erased. The index has found support around the April closing low of 1,358.59 in the past, but a breach there could take it back to 1,340. The benchmark index is moving away from strong resistance at 1,400 after failing to make a convincing move above it.  

Reuters contributed to this report. 

Marcelo Del Pozo / Reuters

In Spain, which sank back into recession in the first quarter, the unemployment rate hit 24.1 percent in March, a level not seen in eurozone data stretching back to 1986.

Europe's two-year-old strategy of austerity isn't working. And there is no Plan B.

The latest evidence that government spending cuts are driving the eurozone deeper into recession came Wednesday with a report on soaring unemployment in the zone's weaker economies.

Overall unemployment hit a 15-year high of 10.9 percent in March, driven by layoffs in Italy and Spain, a tenth of a point higher than in February, according to Eurostat, the European Union's statistics office. That level of joblessness hasn't been seen since 1997, before the euro was introduced to world financial markets.

The average rate masks painfully high levels of unemployment in the hardest-hit countries. In Spain, which sank back into recession in the first quarter, the unemployment rate hit 24.1 percent in March, a level not seen in eurozone data stretching back to 1986. In Greece, more than one in five are out of work. In both countries, half of those under 25 are out of a job.

With deep government spending cuts only beginning, economists believe the jobless rate in Europe is headed higher.

"It now looks odds-on that the eurozone unemployment rate will move appreciably above 11.0 percent over the coming months with an ever-growing danger that it will reach 11.5 percent," said Howard Archer, economist at IHS Global Insight. 

The recession has also begun to take a toll on Germany, the flywheel of Europe's economy and the driving force in the austerity measures imposed on debt-burdened countries with the weakest economies.

German unemployment ticked up last month for only the second time in 25 months, as other economic indicators showed the country's manufacturing sector contracting.

"This is a negative surprise," said Heinrich Bayer, an economist at Postbank. "Economic weakness seems to be taking a toll after all.... We are in a phase of stagnation."

European politicians and bankers have spent the past two years cobbling together a series of plans to force budget cuts on debt-burdened countries, including Greece, Italy and Spain, in return for a financial lifeline. Those efforts initially focused on Greece, which ultimately defaulted on a portion of its debt.

Now, other countries appear to be entering the downward spiral, as spending cuts force layoffs and undermine consumer and business confidence, driving local economies deeper into recession. As those local economies shrink, so do tax revenues - forcing deeper budget cuts and increasing the government's debt burden in relation to the size of its economy.

The leaders who backed those austerity measures now face voters at the polls.

"People - voters - are making it clear to politicians that they are tired of losing prosperity," said Carl Weinberg, chief economist at High Frequency Economics. "You can see that in the latest polls and surveys. It will be clear in national election results in Greece and France this weekend. Austerity is out: renewed economic growth is in."

Given the halting progress made by European leaders over the past two years, though, it remains far from clear whether they can agree on   how to shift course and promote growth.

The recession has weakened an already shaky banking system, which is operating on life support from Europe's central bank. Much of that funding, though, is being channeled back into purchases of government debt floated to fill in deficits. As demand from private investors dries up, banks have become the lenders of last resort to their governments..

That's made it harder for private companies to get the credit they need to expand operations and hire more workers.  

"We're not getting reforms anywhere in Europe," said Steen Jakobsen, chief economist at Saxo Bank. "The access to credit is not there because the governments continue to take a bigger slice of the credit cake. That is the problem."

Sergio Perez / Reuters

Cranes stand at a construction site in Madrid April 16, 2012. Spain may be heading toward a Greece-like financial crisis that could cause trouble for a shaky global recovery.

Just weeks after European officials defused a financial time bomb in Greece, the ticking is growing louder in Spain.

For officials in Madrid, the scenario is painfully familiar to what happened in Athens. Skittish investors, worried that Spain may not be able to pay back some 735 billion euros ($960 billion) in borrowing, have forced interest rates on Spanish debt above 6 percent. That’s a level that most market analysts say isn't sustainable.

But as Greek officials learned, the cure can be more painful than the disease. With its economy already in recession, Spain's central government is enacting spending cuts that likely will slow growth further. 

Spending cuts may prove difficult to enforce because the Spanish constitution gives regional governments autonomy in setting budgets. That’s sparked concerns that the central government's deficit-cutting goals could be tough to achieve.

The central government had agreed to cut its budget deficit to 6.0 percent of GDP last year, but it overshot that target, posting a deficit of 8.51 percent of GDP. Madrid is now aiming for an annual deficit of 5.3 percent in 2012 and 3.0 percent in 2013. 

Such sharp spending cuts would put even more pressure on the Spanish economy. The fear is that Spain faces the same downward economic spiral that has thrown the Greek economy into a sharp, ongoing contraction.

That would not bode well for the still-fragile global economic recovery.

“The euro crisis is not over,” said Robert Parker, a senior advisor at Credit Suisse. “And at least in the short term that can be drag on global growth. Let’s not forget that Europe, except Germany, is still in recession.”

In Spain, that recession has been driven by a steep collapse in house prices, which have dropped 22 percent from their 2007 peak and continue to fall. The government estimates that Spain’s economy will shrink by 1.7 percent this year as spending cuts take hold.

Private economists expect the economy to shrink more rapidly. Loan default rates are at an 18-year high and a rising unemployment rate could trigger more mortgage defaults.

Those defaults have hammered Spanish banks, which have turned to the European Central Bank for cheap funding after the cost of private capital has soared. Spain's banks borrowed a record 316.3 billion euros ($417 billion) from the ECB in March, almost double what they did in February.

The ECB has supplied European banks with roughly 1 trillion euros ($1.3 trillion) of cheap, three-year loans to ease a cash crunch that threatened to cripple the continent’s weaker financial institutions.

While the central bank’s lifeline helped buy some time for the battered European banking system, the longer-term outlook remains uncertain. A review of 100 European banks for possible downgrades by credit rating agency Moody’s was supposed to have been released this week. But amid heavily selling of Spanish bonds, the company said it would postpone the reports until next month.

Spanish officials are struggling to shore up the country’s banking system by asking healthy banks to pay for some of the cost of bailing out weaker competitors. The Bank of Spain, which has already sold four state-rescued banks, reportedly needs at least 20 billion euros ($26.35 billion) to cover losses at three more banks. To avoid tapping taxpayer funds, the government wants the rest of its hard-pressed banking sector to provide the cash.

The European Commission said last week that Spain would not need euro zone financial help to shore up its banking sector. But it’s unclear where the money will come from to bail out Spain’s failed banks.

"We're back in full crisis mode," said Rabobank rate strategist Lyn Graham-Taylor. "It is looking more and more likely that Spain is going to have some form of a bailout."

Frank Augstein / AP

Karl-Friedrich Stracke, CEO of Adam Opel AG, sits inside the new Opel Mokka. He is struggling to restore the GM unit to profitability.

The products were nearly an afterthought when Opel opened its news conference at the Geneva Motor Show last week.

Any other year, a new model like the Mokka crossover or Astra OPC would have garnered the spotlight. But when the German automaker’s new CEO Karl-Friedrich Stracke took the stage the focus was more somber  as declared his goal: “to return our European operations to sustainable profitability.”

He’d better -- and soon.  Opel ran up $700 million in red ink last year, detracting from parent General Motors, which still posted a  record $7.6 billion in profit for 2011.

Turning things around at Opel has proved far more elusive than anyone expected.  Stracke’s predecessor Nick Reilly was summarily “retired” a few months back after failing on his promise of delivering at least a break-even at the European subsidiary.

A frustrated GM has tried one option after another in recent years, hoping to turn the corner on Opel’s problems.  It has cut capacity, rolled out a flood of new products and even considered selling a controlling stake in the unit shortly after emerging from its own 2009 bankruptcy.

Now the automaker has inked an expansive alliance deal with erstwhile rival PSA Peugeot Citroen.  The two new partners insist they can not only reduce costs but also introduce an assortment of new products and powertrains that could give them a competitive edge in the overcrowded European market. But considering the Continent’s worsening economic crisis -- never mind Opel’s recent history -- skeptics abound.

“They’ve got to take out a lot of mass,” said analyst Joe Phillippi of AutoTrends Consulting, referring to Opel’s excess capacity, bloated workforce and out-of-sync cost structure.  “But any savings are likely to take time.”  At best, he cautioned, the fruits of the new alliance won’t be ripe for 18 to 24 months -- if at all.

Two decades ago, Opel was one of Europe's automotive powerhouses.  The brand was locked in a battle with leaders like Volkswagen and Ford but generated reasonable revenues and was considered a likely spearhead for GM as it opened emerging markets from Brazil to Russia and beyond.

But when GM bid to build a new plant in China, regulators there suggested the maker go to market instead with the Buick name -- reviving a brand that was a favorite of China’s last emperor as well as communist leader Zhou Enlai.

Meanwhile, as Opel began running into problems its expansion plans were scaled back, and GM shifted focus to Chevrolet, a brand long dominant in the Americas.  It even brought Chevy into Europe, using the brand to market its lower-priced, Korean made models.

Ironically, while Opel has steadily lost ground, Chevrolet has become one of Europe’s fastest-growing marques, setting one annual record after another.

Some thought Chevrolet might even replace Opel if GM had gone through with a sale of a controlling stake in Opel.

In the end, Opel stayed in the GM family, and the plan is for peaceful coexistence, insists Susan Docherty, president and managing director of Chevrolet Europe. 

“There’s absolutely room for both of us,” she insisted in an interview, noting that despite its fast growth Chevy Europe sold just 206,000 vehicles last year, barely 20 percent of Opel's volume.

Still, there have been plenty of rumors and reports in recent months that GM might again try to find a buyer for Opel. GM CEO Dan Akerson has repeatedly denied a sale is on the table. And the Peugeot alliance reveals an alternative strategy.

The two makers will cooperate on a variety of projects, including joint component and part purchasing that should shave costs by enhancing economies of scale.  Peugeot will provide new and more efficient diesels Opel can use -- critical in the diesel-friendly European market.  And the partners plan to develop new powertrains and product platforms that should reach market sometime after mid-decade.

“It’s very clear we’re looking for synergies,” said Opel chief Stracke in an interview, but he acknowledged it will take time to pull things together.

Stracke cautioned that the alliance won’t solve anything. Notably, “it’s not set up to fix anybody’s capacity problems.  Peugeot needs to fix theirs and we need to fix ours.”

He hinted that Opel is studying its options, with many observers expecting some major announcement in the coming months. That would follow previous steps that have already reduced Opel’s capacity by 400,000 units annually.

New cuts won’t be easy, especially at the maker’s highest-cost plants in Germany, where it is subject to restrictive labor laws -- and where union leaders have significant say in management decisions.  But a recent shake-up in the leadership of union IG Metall could provide an opportunity for change.

Jim Hall of 2953 Analytics is skeptical that the Peugeot alliance -- or even further production cuts -- will solve Opel’s problems.  “The more serious problem,” he says, is the maker’s weak image among European buyers, “and only product can solve that.”

That’s where the Mokka and Astra OPC come in -- along with the new Ampera, the plug-in hybrid sibling of the American Chevrolet Volt (which also is being sold in Europe).

Both Ampera and Volt got a much-needed boost last week when a jury of journalists declared them jointly the European Car of the Year. Stracke said that even before the award Opel had lined up 7,000 advance orders for Ampera, which only went on sale last month.

But it’s going to take a lot more volume than that to fix Opel’s problems. And while the new models and the new alliance will likely help, it’s anyone’s guess when GM’s European arm will finally stanch its bleeding.

Cathal McNaughton / Reuters

Fencing placed in front of The Waterways, an empty and unsold housing development in the village of Keshcarrigan, County Leitrim, Ireland, on Jan. 28, 2012.

Reuters photographer Cathal McNaughton reports on the lasting effects of Ireland's financial crisis:

Cathal McNaughton / Reuters

An electrical cable is used to secure a security fence surrounding Cnoc an Iuir, an empty and unsold housing development in the village of Drumshanbo, County Leitrim.

"If you build it, they will come." The iconic quote from the film Field of Dreams seems like a rebuke to Ireland's misguided builders and planners as the depressing sight of rows of newly built empty houses – windows broken and doors flapping in the wind – stretch out in the distance.

I'd come to Co Leitrim, in the west of Ireland, to see for myself the so-called ghost housing estates that first came to the public's attention four years ago as the Celtic Tiger collapsed leaving thousands of developers bankrupt and projects half finished. Surely in four years, something would have been done about this national embarrassment – so obvious a sign of the demise of Ireland’s once envied economy?

 But the only solution that seems to have been put into action is fencing off the estates – hiding the embarrassing problem behind huge sheets of wood – leaving the houses to crumble into disrepair away from the gaze of despairing neighbours who paid full price for an identical house just 200 yards away.

Cathal McNaughton / Reuters

Unfinished houses at The Waterways, Keshcarrigan.

 Hardly a town or village in Leitrim – the least populated county in Ireland and the worst affected by the over-enthusiastic builders – has been untouched. Pretty lakeside villages with perhaps just 200 residents now have 50 empty 'dream homes' in new developments where fading advertising signs boast of private moorings and roof gardens. Larger market towns have row upon row of once smart new town houses – clearly built with the upwardly mobile commuters who were supposed to move to the countryside as part of the government's largely ignored decentralisation project – now with brambles growing over the gardens, potholed roads unfinished and adorned with graffiti by the kids who use them as drinking dens.

• For Sale: Deserted French village, pool included

Cathal McNaughton / Reuters

Fenced-off houses at The Waterways, Keshcarrigan.

Impressive holiday homes with 'stunning sea views' lie vacant with at most one unlucky tenant sharing their ghost street with long-abandoned builder's rubble and broken advertising signs banging in the wind at night keeping them awake.

Surprisingly many of the houses aren't even for sale any more – even if a buyer could be found in the precarious Irish financial market.

• Ireland to hold referendum on EU fiscal treaty

One resident – the sole home owner in a once stunning lakeside development – explained. "These were all sold but the developer needed more money from the bank to finish it and they refused. He went bust and that was that."

See more images on the Reuters Photographers Blog.

Cathal McNaughton / Reuters

The ironically-named Crest Of A Wave, an empty and unsold housing development in the village of Bundoran, County Donegal.