The pound has risen against the single currency to levels not seen since autumn 2008 after elections in France and Greece at the weekend cast doubt on the viability of austerity plans aimed at tackling the eurozone debt crisis.

It prompted leading foreign exchange outlets, including Travelex, to sell euros at a rate of about 1.20 to the pound for the first time in years, meaning UK travellers to eurozone countries can expect to get far more for their money.

Analysts said the pound could extend its gains even further if politicians failed to form a new Greek government following an election result that called into question the terms of the country's international bailout.

But they also warned that sterling would come under pressure if debt contagion and economic slowdown in the eurozone started to further weigh down the UK economy.

Traders in London reacted cautiously to the weekend election results from France, where socialist Francois Hollande beat current president Nicolas Sarkozy, and Greece.

On the first day of trading after the long bank-holiday weekend, the FTSE 100 share index fell, following a roller-coaster ride on the European markets on Monday.

As both results indicated a public and political sea change against austerity, the eurozone sovereign debt crisis entered a new chapter - sending markets within the single currency bloc into chaos.

The stock market in Athens fell by 7% on Monday after mainstream parties fell short of a governing majority in Sunday's election, putting at risk hard-won agreements to save the country's economy and eurozone membership.

The crisis-hit nation could now face another round of elections next month unless the leader of the left-wing Syriza bloc can bring together the parties who campaigned on an anti-austerity message.

Ideological differences between the parties look set to complicate the task and any rejection of the previous government's cuts and the international bailout deal is likely to cause serious political and financial instability.

In the wake of the elections, German Chancellor Angela Merkel, the chief proponent of austerity as the main way out of the eurozone crisis, said it was "of utmost importance" that Greece sticks to its reform path.

She has ruled out re-negotiating the eurozone fiscal compact despite an election pledge from France's Mr Hollande for a new EU deal that focuses on growth.

At the start of trading on Tuesday, Europe's main stock markets fell, with investor focus stuck firmly on the fallout from the weekend elections.

Government bonds in the debt-laden eurozone countries also came under pressure, pushing yields higher, as in investors seeking a safe haven flocked to German bunds.

Ten-year German government bond yields fell to a near record low, while Greek bonds yielded by almost a quarter, reflecting expectations for another restructuring.

In the currency markets, the euro fell against the dollar and the pound.

Jane Foley, senior currency strategist at Rabobank, told Sky News that there was a "huge amount of uncertainty" in the markets.

"Many investors will be staying at the sidelines in this type of environment," she said.

Meanwhile, the crisis in Spain took a turn for the worse when the Spanish government said it was a planning a bailout of the country's third biggest bank, Bankia.

Bankia is considered to be among the worst hit by the collapse of Spain's real estate in 2008, with more than 30bn euros in toxic assets.

Banks were saddled with enormous amounts of bad loans as unemployment rose and people could not pay their mortgages following the burst in its real estate bubble.

Spain's government, which is currently implementing tough austerity measures in an attempt to put the country's finances back on track, had previously said it would not inject public money into banking sector.

But the Spanish prime minister said such measures could not now be ruled out in order to salvage its balance sheet, with plans likely to be confirmed at the end of the week.

Bankia's executive chairman and former managing director of the IMF, Rodrigo Rato, resigned from the bank shortly after the state-bailout was announced.

Along with Greece, Spain is at the centre of Europe's debt crisis with investors concerned about its ability to push through austerity measures and reforms at a time of recession and with unemployment above 24%.