ATHENS — Greeks began voting Sunday in crucial national elections that are widely seen as a de facto referendum on the country’s future inside the euro, the outcome of which risks setting off a new bout of panic in global financial markets already frayed by Europe’s two-year-long sovereign debt crisis.

Greece has already written off a third of its debts and is in its fifth year running of recession (AFP, Louisa Gouliamaki)

At stake isn’t just control of Greece’s 300-member parliament but potentially the fate of Europe’s fragile 17-member currency bloc. The raging crisis has now spread to Spain, the euro-zone’s fourth largest economy, forcing it earlier this month to ask for a bailout for its banks. It even threatens to engulf Italy, severely testing the region’s sovereign rescue firepower.

Greek voters face a choice between two competing visions of how the country should confront a tough austerity program demanded by its European and international creditors in exchange for aid, but which has helped push the economy deep into recession and unemployment to record highs.

The vote is pitting the conservative New Democracy party—which mostly supports the country’s latest European-led bailout—against its leftist rival, Syriza, which has denounced the deal and wants to tear up the austerity program that came with it.

In a series of public statements in the weeks leading up to the vote, European leaders have warned Greek voters that if the country is unable, or unwilling, to abide by the conditions imposed as part of a €173 billion ($218.67 billion) bailout from the European Union and the International Monetary Fund, Brussels could pull the plug on aid, effectively pushing Greece out of the common currency.

The latest unofficial polls suggest that New Democracy party holds a narrow edge over Syriza, but most analysts say the vote remains too close to call. With some 10% of the electorate undecided, according to the last published polls from two weeks ago, the race could turn on just a small margin of total voters.

The first exit polls are due to be released at 4 p.m. GMT after ballots close, with official projections expected about two to three hours later.

“The final winner may be decided by less than 200,000 voters,” says John Dimakis at STR Ltd, an Athens-based political communications consultancy. “The political environment in Greece is very volatile right now.”

European officials have tried to soothe investor fears abroad by insisting that a Greek exit from the euro zone isn’t imminent, but the world’s leading central banks have pledged to line up measures to calm markets in case the election result unsettles investors.

On Friday, European Central Bank President Mario Draghi, in an effort to calm jitters, said that the ECB “will continue to supply liquidity to solvent banks where needed,” adding to the more than €1 trillion in three-year loans it provided to banks in December and February in an earlier effort to stem the contagion from Greece’s debt crisis.

Whichever party wins Sunday’s Greek vote will face Olympian hurdles with a central government facing a cash crunch within weeks, an economy in free fall and an angry public exhausted by two years of austerity measures.

Greece’s reform program is also well off track, following weeks of political paralysis. The first task facing Sunday’s winner will be to come up with €11.5 billion—maybe more—in new austerity measures being demanded by the country’s creditors but which could further inflame public opinion.

Sunday’s vote is the second time in as many months that Greeks have been called to the ballot boxes to decide their country’s future leader after an inconclusive May 6 election produced a hung parliament. Ten days of coalition talks following last month’s vote failed to produce a stable government, forcing a second round this month.

With state coffers running dry and a new bond redemption pending in August, Greece’s party leaders will be under tremendous pressure to avoid a political deadlock this time.

Socialist leader and former finance minister Evangelos Venizelos Sunday called for a national unity government.

“The country must have a government tomorrow,” Mr. Venizelos said after casting his vote. “The only government that can lead the country out of the crisis and keep it standing is a national unity government of joint responsibility. If we look at the facts, we’ll see that no other scenario offers the kind of solution the country needs.”

Neither of the two top parties is likely to win an outright majority and will have to rely on smaller parties to build a governing coalition. But who finishes first will be key: under Greece’s electoral law, the party that garners the most votes automatically wins a 50 seat bonus prize in Parliament giving it an almost unassailable advantage in forming the next government.

If New Democracy finishes first, it will likely team up with the socialist Pasok party, third in opinion polls, which also supports the bailout. If Syriza finishes first, it could be joined by the small, antiausterity Democratic Left party, giving the two potentially just enough seats to form their own coalition.

In either case, those majorities are likely to be thin and may not survive the tough decisions that lie ahead.

In the event that coalition talks stumble this time, too, New Democracy leader Antonis Samaras, in his last campaign rally in Athens Friday, called for a national unity government, saying the economy, the banking sector and the public can’t withstand another round of elections.

“If there is no government in coming days, the most likely outcome is that we have won’t have time to go to new elections,” he said.

@WSJ.com