UPDATE 5-Greece calls new elections after talks collapse
* Greek politicians fail to agree on government
* New elections called; mid-June date seen
* Anti-bailout leftists seen winning new vote
* Analysts fear Greek bankruptcy, euro zone exit
By Lefteris Papadimas and Dina Kyriakidou
ATHENS, May 15 (Reuters) - Greece abandoned a nine-day hunt for a government on Tuesday and called a new election that may hand victory to leftists who might cut the nation's financial lifeline, pushing it closer to bankruptcy and out of the euro zone.
After six rounds of fruitless wrangling, party leaders emerged from a final session at the presidential mansion to gloomily declare that deep divisions over a 130-billion-euro foreign bailout package had killed any hope of a coalition deal.
"We shouldn't have reached this point," said Socialist leader Evangelos Venizelos, who personally negotiated the rescue package from the European Union and IMF which the hard left says has imposed too harsh an austerity regime. "For God's sake, let's move towards something better and not something worse."
Reviled for imposing deep wage and spending cuts but vital to keep the country running, the bailout worth $166 billion prompted Greeks to elect the most fragmented parliament in decades on May 6, giving no party or bloc a clear mandate.
A second election is expected to produce a similarly divided legislature, but the balance of power is seen tipping towards opponents of the EU/IMF rescue and raising the likelihood of a coalition that reneges on the deal keeping Greece afloat.
That would almost certainly mean the end to aid from foreign lenders, leaving Greece without cash as early as next month and paving the way for its eventual exit from the euro zone.
Greeks who showed their fury against spending cuts by humiliating the long-dominant Socialist and conservative parties earlier this month must now choose between the pain of austerity and an even more painful return to the drachma currency.
"Much depends on whether the Greek people in this repeat election are going to vote with anger and passion or if they will cool off, reflect and see in effect what the real choices are," said Theodore Couloumbis, analyst at the ELIAMEP think-tank. "The choice is between bad and worse."
Financial markets, worried that a Greek euro exit could spread turmoil to bigger euro zone economies such as Spain and Italy, tumbled on the news. The euro fell to a four-month low against the dollar, while Italian and Spanish bond yields rose. Greek stocks fell 5 percent to a 20-year low before paring losses. They closed down 3.6 percent.
YES TO EURO, NO TO DEVASTATION
A compromise to produce a government that might save the country from further financial calamity proved elusive; the three biggest parties in the newly elected parliament each failed to form a coalition last week and three additional rounds of talks mediated by the president ended without result.
Dejection was visible on the faces of the five party leaders who sat down to talks on Tuesday. The far-right Golden Dawn was not invited, while the anti-euro Communists did not show up. A tense meeting ensued, sources from two parties said.
After barely two hours, the politicians threw in the towel. A spokesman for President Karolos Papoulias summoned reporters to announce a new election and plans to form a caretaker government on Wednesday. The vote is expected in mid-June.
Almost immediately, Greek party leaders were in front of cameras and supporters in spirited pre-election campaign mode.
Conservative leader Antonis Samaras, whose push for early elections backfired and left him without enough support to renew his pro-bailout coalition with the Socialists, appeared distraught as he made his appeal to voters to back him.
"The message you sent is clear: 'Yes' to the euro, 'No' to those policies which devastate the Greek people," said Samaras.
Polls show the leftist SYRIZA party, which rejects the bailout and came second behind Samaras's New Democracy, is now on course to win a new election, a result that would give it an automatic bonus of 50 seats in the 300-seat parliament.
The party's charismatic 37-year-old leader, Alexis Tsipras, has soared in popularity by promising Greeks a future in the euro zone without the yoke of austerity - horrifying European leaders who say the country cannot have its cake and eat it too.
"If we have any hope today it is because all together we took a big step on May 6. Now it's time to conclude it," said Tsipras, a handsome, ex-Communist student leader who burst into the political mainstream after this month's shock vote.
"The time has come to form a government of the Left, with wide support, and put an end to the these policies that destroy this country."
The prospect of new elections has left European lenders which have bailed Greece out twice close to despair. Senior European Commission officials held urgent talks on Tuesday to work through the fallout from a second Greek election.
"We are really at a critical juncture," one official taking part in the discussions said. "The decisions are really in Athens' hands. But it doesn't look good."
As French President Francois Hollande flew to Berlin to meet German Chancellor Angela Merkel for crisis talks on the very day he was sworn in, Merkel's foreign minister, Guido Westerwelle, called the failure in Athens a "bitter blow" to trust in Greece.
"What Greece needs now is dependability and the will to reform to help it get over the mountain, in close collaboration with its European partners," he said. "The reforms to achieve this are hard and painful but they are the only way back to growth and competitiveness. There is no alternative."
Even if European lenders were to cut Greece some slack on its austerity commitments, there is no government in place to negotiate a next tranche of aid - and no guarantee there will be one before Greek cash coffers run empty.
Greece's predicament is hardly new. The country has lurched from one crisis to the next over the past two years and is now enduring its fifth year of recession. Nearly one Greek worker in five has no job. Protests, riots and highly public suicides have become commonplace in a sharply volatile social climate.
Initially exultant at having humbled their political class in this month's vote, Greeks are now increasingly worried the country is on a path of no return.
"The country is finished," said Panos Leonidas, 57, a travel agent. "From now on, you can only live here if you're an animal."