Analysis: Greek election set to rock shaky euro zone

By Luke Baker

BRUSSELS (Reuters) - Overshadowed by the prospect of a Socialist win in France's presidential vote, the parliamentary election in Greece on Sunday carries far greater risks for the euro zone.

Opinion polls show no clear winner emerging from the vote, with the two main parties - centre-right New Democracy and PASOK's socialists - together garnering around 38 percent of the ballot, barely enough for a parliamentary majority under Greece's electoral system.

Either they will secure just enough to work as together, albeit uncomfortably and with a very slim majority, or steps will have to be taken to form a broad coalition with minor parties firmly opposed to the European Union's austerity measures.

That in turn will increase the pressure on the new government to renegotiate parts of the second bailout program, an ambitious deal struck in February that aims to clear the way for Greece to return to financial markets by 2015.

Some economists take the view that Sunday's election could push Greece back to the nadir it touched in November last year, when there was widespread talk of an exit from the euro zone. The contagion effect would drive Spanish and Italian bond yields straight back into the danger zone, economists say.

"Political paralysis in Greece following the elections could lead to a default and even threaten a euro exit, in our view," Bank of America strategist Athanasios Vamvakidis wrote in a research paper published on Tuesday.

"We believe that the troika may have little choice but to stop funding Greece if there is no government in place," he said, referring to the monitoring mission made up of the European Central Bank, the IMF and the European Commission.

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