Stocks, commodities slide ahead of German vote

Taxi drivers attend a protest outside Transport Ministry during a rally calling for the government to rescind a new taxi deregulation law in Athens, September 28, 2011.

NEW YORK (Reuters) - Commodity prices fell and stocks ended a three-day rally on Wednesday on anxiety over a looming German vote to strengthen the fund set up to help the euro zone combat its debt crisis.

Infighting in the German ruling coalition turned investors skittish, as a failed vote would hamper the bloc's ability to prevent a Greek default that could send the global financial system into turmoil.

Market perception that a sovereign default in Europe could harm the global economy was underscored by a sharp decline in copper prices, a proxy for growth expectations.

Global stocks had rallied in the past three days on optimism Europe was getting a handle on the crisis. But the drop in stocks and the euro showed markets remain very sensitive to any signs of a setback.

An index of world stocks dropped 1.4 percent following its best day in a year and a half. Copper fell nearly 7 percent and U.S. crude oil futures dropped 4.3 percent. Nikkei futures fell 0.7 percent.

"There has been widespread liquidation across (commodities) ahead of the German Bundestag lower house vote on Thursday on whether to back new powers for the euro zone's rescue fund," said Phillip Streible, analyst at MF Global in Chicago.

For the day, the Dow Jones industrial average dropped 179.79 points, or 1.61 percent, to 11,010.90. The S&P 500 slid 24.32 points, or 2.07 percent, to 1,151.06. The Nasdaq Composite Index lost 55.25 points, or 2.17 percent, to 2,491.58.

Traders also cited the month-end and quarter-end as a reason for wild moves in various markets.

Global stocks were on track to post their worst month in 16 and their worst quarter since the end of 2008.

The euro zone's sovereign debt issues have dragged on regional economies and threatened banks across the continent and beyond.

European Union and International Monetary Fund inspectors will return to Athens on Thursday to decide whether the Greek government has done enough to secure help from its neighbors and avoid a default.

"We are trying to avoid a Greek insolvency. But I cannot rule it out," German Chancellor Angela Merkel was quoted by Bild newspaper as telling her coalition ahead of an increasingly complex vote amid concerns that German taxpayers' investments might have to be written off.

Benchmark U.S. Treasury yields dipped back below 2 percent as demand for government bonds picked up in late trading. U.S. 10-year Treasury prices fell 4/32 of a point to yield 1.994 percent.

The euro was down 0.2 percent at $1.3557 after having earlier hit a one-week high of $1.3690.

(Reporting by Rodrigo Campos; Additional reporting by Gene Ramos; Editing by Dan Grebler)