GLOBAL MARKETS-Stocks, euro plunge on Greek default fears

* U.S. stocks fall around 2 pct as financials weigh

* Euro drops to 10-1/2-year low versus yen

* Bank shares down in Europe on fears of Greece default

* U.S. crude oil prices close at 12-month low (Updates with oil closing prices)

By Walter Brandimarte

NEW YORK, Oct 3 (Reuters) - World stocks fell to a two-year low and the euro tumbled to its weakest level against the yen in more than a decade on Monday as growing fears of a Greek default unleashed anxiety about the impact on the global economy.

An admission by Athens that it will miss its deficit target of 7.6 percent this year reignited the fears over a Greek default. The price of U.S. crude oil tumbled 2 percent, while a bid for safety stoked demand for U.S. Treasury debt.

The major U.S. stock indexes fell around 2 percent, with financial shares hard hit on a new round of fears over Greek debt, eclipsing an early boost from better-than-expected U.S. manufacturing data. For details, see [ID:nN1E7920NX]

Bank shares were also battered in Europe as investors feared they may have to make further write-downs on Greek debt holdings. French-Belgian financial group Dexia (DEXI.BR) shares slumped 10 percent as its capital position looked increasingly stretched by its exposure to Greece.

Athens, in a draft budget sent to parliament on Monday, forecast a deficit of 8.5 percent of gross domestic product for 2011.

"This news isn't surprising, but if Greece continues to have problems, that could really drag Europe into recession, and possibly the U.S. as well," said Randall Warren, chief investment officer of Warren Financial Service in Exton, Pennsylvania.

European policymakers appeared no nearer to agreeing on a definitive solution to the crisis. Officials meeting on Monday were discussing ways to leverage the bloc's rescue fund and pressure Greece to implement agreed structural reforms. [ID:nL5E7L20LD]

"Ultimately, Greece would need to see its debt written down by more and with that you need probably some kind of shoring up of the banking sector," said Alec Letchfield, chief investment officer at HSBC Asset Management.

U.S. stocks extended losses in the afternoon. The KBW bank index .BKX fell 3.8 percent, with Morgan Stanley (MS.N) shares down 6.1 percent and Bank of America (BAC.N) shares down 8.8 percent. On Friday, stocks closed their worst quarter since 2008.

The Dow Jones industrial average .DJI fell 191.28 points, or 1.75 percent, to 10,722.10, while the Standard & Poor's 500 Index .SPX lost 23.61 points, or 2.09 percent, to 1,107.81. The Nasdaq Composite Index .IXIC was down 62.58 points, or 2.59 percent, at 2,352.82.

The MSCI All-Country World index .MIWD00000PUS fell 2.6 percent to its lowest level since July 2010. The FTSEurofirst 300 .FTEU3 of top European shares ended 1.2 percent lower.

The October-December period is, traditionally, the best quarter for equities. Reuters data shows that since 1971, world stocks have on average risen 3.7 percent in the fourth quarter.

Dexia closed 10.16 percent lower after credit agency Moody's announced a rating review for possible downgrade on concerns about liquidity. Dexia called emergency board meeting on Monday, a source familiar with the matter told Reuters.

Belgian and French finance ministers were also meeting together with other euro zone leaders on Monday evening. The Belgian finance minister, Didier Reynders, said the two states, both Dexia shareholders, would do all that was required to support their banks. [ID:nL5E7L30GX]

The euro EUR= hit an 8-1/2-month low of $1.323 on trading platform EBS.

Against the safe-haven yen, the euro was down 1.7 percent at 101.36 yen EURJPY=, its lowest since May 2001 according to Reuters data.

"Euro zone bank issues remain a big issue, and we expect the euro's downside to continue," said George Saravelos, G10 FX strategist at Deutsche Bank.

The benchmark 10-year U.S. Treasury note US10YT=RR was up 37/32 in price, driving its yield down to 1.7883 percent. Treasuries prices were also supported by the Federal Reserve's first bond purchase for Operation Twist, its latest bond program aimed at helping the U.S. economy.

U.S. crude oil prices CLc1 settled down $1.59 at $77.61 a barrel, the lowest settlement in more than a year. (Additional reporting by Ryan Vlastelica in New York, Natsuko Waki in London; Editing by Leslie Adler)