Germany has rejected a Greek request for a six-month extension to its eurozone loan programme, after earlier signs that a compromise was possible.
Greece had sought a six-month assistance package, rather than a renewal of the existing deal that comes with tough austerity conditions.
However, a German finance ministry spokesman said it was "not a substantial proposal for a solution".
The European Commission had earlier called the Greek request "positive".
"[European Commission] President Juncker sees this letter as a positive sign, which, in his assessment, could pave the way for a reasonable compromise in the interest of the financial stability in the euro area as a whole," Commission spokesman Margaritis Schinas said.
"The detailed assessment of the [Greek loan] letter and the response is now up to the Eurogroup," he added, referring to a Friday meeting of European finance ministers in Brussels, which will discuss the Greek proposal.
But just minutes later the German finance ministry spokesman said the Greek request was an attempt at "bridge financing, without meeting the requirements of the programme. The letter does not meet the criteria agreed upon in the Eurogroup on Monday."
The Greek request letter includes a pledge to maintain "fiscal balance" for a six-month period, while it negotiates with eurozone partners over long-term growth and debt reduction.
The Greek government was also reported as saying that its extension proposal was in order to give Athens enough time, without the threat of "blackmail and time deficits", to draw up a new agreement with Europe for growth over the next four years.
The uncertainty was reflected on stock markets, with the FTSE 100 and Frankfurt's DAX index both losing early gains after Germany's rejection.
Mirabaud Securities trader John Plassard said: "Investors think that even if a deal is reached, it won't mean that the 'Greek issue' will be resolved. There will be serious doubts on whether Greece will fully implement the agreement."
Greece faces running out of money by the end of the month without a deal and deposits continue to flow out of its banks.
How the German papers see the Greek negotiations:
Popular tabloid Bild has a double-page spread featuring pictures of Vladimir Putin and Alexis Tsipras with the headline: "The Russian or the Greek: who is more dangerous for us?" Underneath it says: "Europe is in the most difficult crisis it's seen for decades -- because two heads of government are aggressively demonstrating their power."
A commentary in Frankfurter Allgemeine Zeitung says: "The Greek government appears to believe it can treat its partners like fools," accusing the Greek government of using Brussels like a stage for theatrics, adding that many people have simply had enough.
And the business paper Handelsblatt says the request for a loan extension changes very little. "It remains unclear whether Athens is willing to meet the conditions set by its creditors." And that, the paper says, is crucial for the meeting of European finance ministers on Friday.