ATHENS - Greece has confirmed it would fail to make a key IMF repayment due on Tuesday, fanning fears of a chaotic eurozone exit on the same day the country's international bailout expires.
At the same time the European Commission said it had offered an eleventh hour deal to Prime Minister Alexis Tsipras to stave off a crisis which could rupture the eurozone and risks a knock-on effect on other troubled countries.
Tsipras has urged Greeks to reject creditors' tough reform demands in a referendum on Sunday, but has also pleaded for an bailout extension to keep Athens afloat.
Failure to pay would see Greece become the first country to default on the International Monetary Fund since Zimbabwe in 2001. In terms of standards of living, it would be the wealthiest.
With just hours to go before the deadline, finance minister Yanis Varoufakis gave an emphatic "no" to questions over whether Greece would make the debt repayment of about 1.5 billion euros (S$2.25 billion) on Tuesday.
Europe's main stock markets dropped on the news, though losses were less acute than on Monday.
Tsipras, elected on an anti-austerity ticket in January, on Monday blamed creditors for "suffocating" the banks and making it impossible for the country to pay up its debt.
Thousands of people poured onto the streets of Greece's two biggest cities, Athens and Thessaloniki, on Monday night to support their government's opposition to the latest proposals, after a clash with creditors forced the closure of banks and the imposition of capital controls.
Greece's international bailout programme from its "troika" of lenders - the European Union, European Central Bank and the IMF - also expires Tuesday.
Talks between Greece's leftist government and its creditors fell apart after Tsipras called a shock referendum on the latest proposals.
Tsipras sought to calm nerves on Monday by leaving the door open, saying the July 5 plebiscite on the creditors' latest cash-for-reform plans would leave Greece "better armed" in the fight for a debt deal.
'Last minute' solution
European Commission chief Jean-Claude Juncker set out a possible "last-minute" solution for an accord before the referendum, with a euro-MP from Tsipras's hard-left Syriza party saying the plan should be studied.
Juncker told the Greek premier that a deal would involve accepting reform proposals that Greece's EU-IMF creditors made at the weekend and backing a 'Yes' vote in Sunday's plebiscite.
A Greek government source said that negotiations were taking place between Athens and its creditors, though a European Commission spokesman said time was "running out quickly".
German Chancellor Angela Merkel said she knew nothing about a new offer from Juncker for Greece.
EU leaders including Merkel, France's Francois Hollande and Italy's Matteo Renzi have joined Juncker in warning that the referendum would effectively be a vote on Greece's place in the eurozone.
The government has called for Greeks to vote 'No' rejecting the creditors' debt proposals and Tsipras has staked his own career on the outcome.
Spanish Prime Minister Mariano Rajoy added Tuesday that a "yes" victory in the referendum would allow Greece's creditors to negotiate with a new government.
Athens lashed back Tuesday, with Labour Minister Panos Skourletis warning that European leaders want to "sink" Greece's ruling Syriza party to block the rise of other far-left anti-austerity parties like its ally Podemos in Spain.
European leaders "fear the rise of forces like Podemos and they want to take the wind out of their sails through any means possible," Skourletis said in an interview.
He labelled Juncker's call for Greeks to vote yes in the referendum as a "provocation".
"Today they interfere in the interior affairs of Greece, tomorrow they will do it in Spain and Italy," said Skourletis, a heavyweight in Greece's coalition government.
'Respect the decision'
In Greece, many people have been caught up in lengthy queues at ATMs after banks were shut down for one week, to withdraw the maximum daily allowance of 60 euros ($66). Tourists are however allowed unlimited withdrawals.
"We brought quite a lot of cash with us, but we've been budgeting to make sure it doesn't run out," said Michele Ammann, 48, from Switzerland.
"I feel sorry for the Greeks, they've been asked to sacrifice everything, right down to their underpants." Many Greeks backed the government's defiant stance against the country's creditors, who they blame for forcing the country into years of painful recession by demanding swingeing austerity cuts.
"Our aim is for the referendum to be followed by negotiations for which we will be better armed," Tsipras has said, vowing to "respect the decision" of the Greek people.
As the tussle over Greece's future intensified, sympathetic people donated over 30,000 euros to an online crowdfunding project set up by a British shoe-shop employee to help meet the IMF repayment In more gloomy news for Athens, Standard & Poor's ratings agency downgraded Greece's credit assessment deeper into junk territory, saying the referendum brought it closer to default.
Fitch also cut its ratings on four major Greek banks to "restricted default".
Greece has debt worth nearly 180 percent of its GDP after receiving two bailouts worth 240 billion euros since 2010. Unemployment has more than doubled since 2009 to 25.6 percent and pensions and benefits roughly halved between 2010 and 2014.