Fears of a Greek default that could spark a global market contagion dragged down stocks on Monday, knocking European equities to two-year lows and sending the euro to a seven-month low against the dollar.
Concerns that Moody's Investors Service might downgrade the credit-worthiness of French banks, which are widely exposed to Greek bonds, and the lack of a solution to Greece's months-old debt crisis rattled investor confidence.
Assurances from France that it can withstand the crisis helped steady the euro and calm investor jitters.
Investors sold assets perceived as risky and bought government debt. The yield on benchmark US treasury 10-year notes briefly slid to the lowest level in at least 60 years and 10-year Bund yields fell as low as 1.71%.
"The fear goes well beyond Greece. The yields at Italy's T-bill auction today surged, signaling that contagion is real," said David Thebault, head of quantitative sales trading at French broker Global Equities.
Bank of France Governor Christian Noyer said French banks have no liquidity or solvency problems and that they can withstand any crisis event in Greece.
Some analysts downplayed the risks, helping stem the euro's losses and limiting the rise in debt prices. But fear gripped most markets, where prices were volatile in thin trade.
The euro fell as low as USD 1.34949 , its lowest since February, and then pared losses to seesaw near break-even. It was down 0.5% at USD 1.35880.
The mounting fears of a Greek debt default and concerns after the surge in Italian bond yields prompted investors to dump equities across the board in Europe.
Investors fretted over French bank exposure to Italy after yields at a debt auction hit a three-year high above 4%, up from 2.96% at a sale a month ago.
The pan-European FTSEurofirst 300 index of top shares fell 2.7% to close at 890.98, after earlier slumping to 883.04, its lowest level since July 2009. The index
has lost more than 20% in 2011.
Shares of French banks Societe Generale, Credit Agricole and BNP Paribas slumped more than 10% amid expectations of an imminent downgrade, due largely to their exposure to Greek bonds.
MSCI's all-country world equity index fell 2.0%.
On Wall Street, the Dow Jones industrial average was down 66.86 points, or 0.61%, at 10,925.27. The Standard & Poor's 500 Index was down 7.42 points, or 0.64%, at 1,146.81. The Nasdaq Composite Index was down 4.53 points, or 0.18%, at 2,463.46.
"There's a lot of uncertainty with respect to Europe, and so long as that exists there's no drive to take us forward," said Joseph Cangemi, managing director at BNY ConvergEx Group in New York.
"We have no timeline about when we could get any clarity, and financials will continue to be the most egregiously hit in this environment."
Sectors tied to economic growth prospects were among the hardest hit Monday, with the S&P materials index down 2.0% and the energy index off 1.1%.
Losses were limited on Nasdaq after wireless chipmaker Broadcom Corp agreed to buy NetLogic Microsystems Inc for about USD 3.7 billion, pushing its shares up 50%.
Merger activity always cheers investors. In addition, the merger "is a sign that many stocks are undervalued from a historical perspective," said Cangemi. US treasury debt prices were lower.
The US Dollar Index rose 0.6% at 77.641.
The global benchmark in oil, North Sea Brent, fell while US crude prices rose as traders sold the spread between the two prices after it widened to a record high last week.
Brent crude oil settled down 52 cents per barrel at USD 112.25. U.S. crude settled up 95 cents to USD 88.19.
Spot gold prices fell USD 45.52 to USD 1,811.70 an ounce.
