A Greek exit from the euro currency threatens to push Britain into a recession equal to that suffered after the 2008 financial collapse, the Government's chief economic forecaster has warned.
The claim comes amid reports that German Chancellor Angela Merkel has suggested to Greece it should hold a referendum on the euro at the same time as the country's elections on June 17.
Berlin at first refused to comment on the rumour, and is now denying the chancellor ever suggested such a vote during a phone call to Greek President Karolos Papoulias.
Fears are growing that Greece's choppy political waters could lead to a jolt in the global economy.
Sky News' Joel Hills, in Athens, said: "It is perfectly reasonable to assume the effects (of Greece abandoning the euro) would be disastrous for the people of Greece and the results would reverberate around the world."
The FTSE 100 has suffered five consecutive days of falls in response to the on-going debt crisis in Greece and Spain.
And Robert Chote, the chair of the Office of Budget Responsibility (OBR) , has warned that the UK economy may never fully recover after another major slump.
"The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession," he told the Guardian newspaper.
He said such a situation "has consequences both for hitting economic activity in the economy but also its underlying potential".
Shares in London lost 1.3% or 70 points on Friday to close at 5267, the lowest level since November last year, after rating agency Fitch downgraded five Greek banks.
The fall came amid growing fears that Greece will leave the eurozone after the Greek electorate, angry over austerity measures, backed parties opposed to a bailout deal.
No party was able to form a government, however, and the country now faces further political stalemate as it prepares for a new round of elections.
Hills said the elections next month will determine whether Greece sticks with the euro. He said the party most likely to come out on top is the left-wing Syriza party.
"Syriza is saying, 'Elect us and we will renegotiate the terms of the bailout'," Hills said.
"It is a message that is resonating with the Greek people... polls show one in five people will vote Syriza in the elections."
Prime Minister David Cameron called on eurozone leaders to take "decisive action" to resolve Greece's problems.
Speaking before a G8 summit expected to be dominated by the eurozone crisis, he said: "This is in Britain's interest too because we want to have a successful growing eurozone on our doorstep and not the instability we have now."
According to an OBR analysis a disorderly sovereign debt restructuring in the eurozone would likely plunge Britain into two years of recession, push unemployment to 11% and debt to more than 90% of GDP.
However, Mr Chote warned that these figures were of limited value in predicting the impact of the crisis because of the many ways in which the situation could develop.
"For example, one issue would be, do difficulties in the eurozone make it cheaper or more expensive for the UK Government to borrow," he told the Guardian.
"If it makes investors more nervous about risk in general it might make it more expensive. If they see the UK as more of a safe haven, it might make it less expensive."