Eurozone leaders were thrashing out a Greek bailout deal through the early hours on Monday after Athens received an ultimatum to accept harsh reforms or be forced to leave the single currency.
Time was running out to get a desperately needed debt agreement in place after 10 hours of talks in Brussels, with Greece\’s economy and banking system at risk of imminent collapse.
Europe appeared at its most divided for decades as Greece and its 18 eurozone partners worked on a statement detailing steps expected from Athens, including the enactment of reforms in parliament by Wednesday.
Hardline Germany pushed for a Greek "time out" from the euro if leftist Prime Minister Alexis Tsipras did not accept a take-it-or-leave-it three-year rescue plan worth up to 86 billion euros ($96 billion), with many of the reforms even harsher than those Athens had previously rejected.
Greece said the draft terms were "very bad", but with its banks running out of cash, it had little choice but to bow to demands that effectively rob Athens of control of much its finances.
"There will be no agreement at any price," German Chancellor Angela Merkel said as she arrived for what was billed as a last-chance summit Sunday, complaining of a loss of trust in Athens and warning of "tough negotiations" ahead.
Tsipras insisted a deal was possible "if all parties want it", adding that he was ready for an "honest compromise" on Greece\’s plans for tax cuts and pension reform.
Tsipras was elected in January vowing to end five years of austerity tied to two previous bailouts since 2010 that have left Greece with debt worth nearly 180 percent of its GDP.
He has since become a standard-bearer for leftist parties across the continent who say the austerity policies championed by Brussels undercut growth and cause massive unemployment.
The eurozone turned the screws after finance ministers finished two days of intense talks on Greece\’s own reform proposals drawn up to satisfy its international creditors — the EU, the European Central Bank and the International Monetary Fund.
The Greek parliament approved the plans on Saturday, despite them being similar to those rejected by Greeks in a controversial referendum on July 5.
But for the eurozone to consider a third bailout package, Greece would now have to push through new even tougher laws by Wednesday, Finland\’s Alex Stubb said after the eurozone finance ministers meeting.
Athens would have to introduce harsh conditions on labour reform and pensions, VAT and taxes, and measures on privatisation, he said.
For the first time in the history of the single currency, the Eurogroup even proposed a temporary Greek exit from the euro, an idea first floated by Germany.
"In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring," said a document obtained by AFP.
Diplomatic sources said that as the talks progressed it was no longer certain that this provision would be in the final statement.
Other measures include letting the "troika" of creditors back on the ground in Athens after they were expelled by Tsipras\’s government, and getting creditors\’ approval for any legislation affecting issues covered by the bailout.
The crisis has exposed tensions between the eurozone\’s two biggest powers with pro-austerity Germany going head to head with France, which has been the country most supportive of Greece during the crisis.
French President Francois Hollande said Paris would do "everything" to keep Greece in the euro and ruled out the "temporary Grexit" proposal.
Five years have elapsed since the Greek debt drama began, but the latest instalment has opened deeper-than-ever rifts in the European single currency, the heart of the post-war dream of a politically unified Europe.
In Greece, there is growing alarm at capital controls that have closed banks and rationed cash at ATMs for nearly two weeks, leading to fears that food and medicine will soon run short.
"We don\’t sleep, everybody\’s worried," a Greek pensioner said, watching with concern the events taking place in Brussels several thousand kilometres (miles) away.
The ECB is providing emergency liquidity to keep Greek banks afloat but has frozen the limit, with fears that failure to reach a deal could cause it to shut off the taps completely.
Despite the clear tensions and uncertainty in Brussels, the reaction on the financial markets was muted.
The euro eased in early Asian trade Monday and stock markets were mixed.
"Market reaction in the euro is surprisingly muted," said Steven Englander, global head of Group-of-10 currency strategy at Citigroup.
"The absence of agreement and toughness of terms are eye-catching but investors are waiting for the outcome more than trying to anticipate it."