Global stocks, euro sink on Greece exit jitters

NEW YORK (Reuters) - World stocks skidded and the euro fell to a 21-month low on Wednesday on worries about Greece's possible exit from the euro zone, which would deepen the region's debt crisis and hurt an already fragile global economic recovery.

Each euro zone country will have to prepare a contingency plan for the eventuality of Greece leaving the bloc's currency, three euro zone sources told Reuters, citing an agreement reached by officials.

A scramble for low-risk investments enabled Germany to pay no interest on 5-billion euros worth of new two-year debt amid the absence of new measures to tackle the region's debt crisis from a European leaders' summit in Brussels.

"The markets are on edge and sensitive to every possible out-of-control scenario coming out of Europe," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Europe's leaders were expected to discuss boosting growth at a meeting later on Wednesday, as well as the idea of a joint euro-zone bond. French President Francois Hollande supports the bond plan, but German Chancellor Angela Merkel opposes it.

"Most are expecting no concrete solution out of the meeting, just a few ideas discussed on how to boost growth with no real commitment to carry them out, while Angela Merkel is almost certain to reject any proposal by Francois Hollande in relation to euro bonds," said Craig Erlam, market analyst at Alpari.

Perception of a stalemate between the leader of the euro zone's most powerful member and heads of other bloc countries unleashed selling of their common currency and shares worldwide.

The MSCI world equity index tumbled 2.2 percent to 296.65, its lowest level in about five months. It is on track for its biggest single-day decline in six months.

At midday on Wall Street, the Dow Jones industrial average was down 177.63 points, or 1.42 percent, at 12,325.18. The Standard & Poor's 500 Index was down 18.57 points, or 1.41 percent, at 1,298.06. The Nasdaq Composite Index was down 37.49 points, or 1.32 percent, at 2,801.59.

The tech sector was a drag on U.S. shares, led by personal computer maker Dell Inc, which reported disappointing second-quarter earnings late on Tuesday. Dell dropped 17.6 percent to $12.43.

Social networking company Facebook Inc remains a market focus since its stock started trading last Friday. Regulatory inquiries on its initial public offering have hammered its market value.

Facebook stock snapped a three-day losing streak. It rose 3.6 percent to $32.12, which is still below its $38 IPO price.

The FTSE Eurofirst index of top European shares provisionally closed 2.2 percent lower at 971.99 after touching a fresh year low at 970.98.

In Tokyo, the Nikkei index closed down 2 percent at 8,556.60.

The euro fell 0.9 percent to 1.2572 after touching $1.2563, its lowest level since August 2010.

"The euro is mostly selling off because of the dysfunctional process. We don't know what's going to happen and we don't know what the European leaders want - there is no leadership," said Axel Merk, portfolio manager of the $650 million Merk Hard Currency Fund in Palo Alto, California.

Contagion fears from the fiscal woes in Europe, with encouraging data on new U.S. home sales, strengthened the dollar against most major currencies. The dollar index rose 0.8 percent to 82.160 after touching 82.163, its highest since September 2010.

Euro zone finance officials prepared contingency plans for a possible Greek euro exit on Monday afternoon, according to euro zone sources, during an hour-long teleconference of the Eurogroup Working Group. A document seen by Reuters detailed the potential costs to individual member states of a Greek exit and said that if it came about, an "amiable divorce" should be sought.

The strong German Schatz auction lifted June Bund futures to a fresh contract high at 144.28, up more than 1 point on the day. Benchmark U.S. Treasury yields slipped to 1.71 percent, within striking distance of the lowest level in at least 60 years.

The United States, like Germany, could enjoy a further drop in borrowing costs when it sells $35 billion of new five-year notes at 1 p.m. (1700 GMT). These five-year issue is expected to sell at an historic low yield at about 0.75 percent.

Signs of a potential deal between Iran and the U.N.'s International Atomic Energy Agency to unblock investigations of suspected work on nuclear weapons in the oil-producing country sent Brent crude below $107 a barrel.

July Brent traded down $2.60 at $105.81, while U.S. oil futures declined $1.95 to $89.89 a barrel.

Spot gold fell for a third straight session, down 2.1 percent to $1,535.40 an ounce, close to its lowest level this year. Bullion prices are on track for the biggest one-day decline since late February.

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