Greek vote on bailout hammers stocks and euro

A man is reflected on an electronic board displaying stock prices outside a brokerage in Tokyo October 31, 2011.

NEW YORK (Reuters) - Stocks and the euro took a beating on Tuesday after Greece's surprise call for a referendum on the latest euro zone bailout deal rekindled fears the country could face an imminent default.

The euro fell to a near three-week low against the dollar and banking stocks plunged after Greek Prime Minister George Papandreou late on Monday said he would ask voters to decide if they wanted to adopt the drastic spending cuts required for Greece to secure its next tranche of rescue loans.

"It's a huge shock to everyone," said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto. "It could jeopardize the bailout package, cause a disorderly Greek default and end up costing the euro zone and banks more money."

The euro zone's plan would lend Athens 130 billion euros and arrange a 50 percent write-down on its huge debt.

U.S. stocks tumbled more than 2.5 percent and European shares posted their biggest one-day loss in more than a month after they rallied last week when European leaders adopted a broad plan with the goal to help debt-laden Greece and to stop the spread of the region's debt crisis.

Euro zone banks .SX7E and insurers .SXIE led the retreat in Europe, with declines of 9.5 percent and 11.5 percent, respectively, but no sector was immune.

Stocks and the euro briefly came off lows after the leaders of Germany and France said they were determined to implement decisions made at the European Union Summit last week fully and on a report of opposition to the referendum.

Investor appetite for risk was also undermined by data on Tuesday showing an unexpected slowdown in Chinese and U.S. manufacturing, as well as Monday's news of the bankruptcy of U.S. futures broker MF Global MF.N. The economic data helped drag down the price the oil.

Investors piled into U.S. and German government bonds and other perceived safer investments.

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If Greeks do vote against the rescue package, it could hamper efforts to contain the euro zone's debt crisis from spiraling into a global one. A vote will likely be held in early 2012.

"The Greek referendum position and plan for a no-confidence vote has caused the market to price back in the risk of a Greek exit from the euro," said Ray Attrill, head of FX strategy for North America at BNP Paribas in New York.

Germany's chancellor, Angela Merkel, and French President Nicolas Sarkozy, the two key figures behind the Greece bailout plan, said they would meet with Greek leaders, the International Monetary Fund and European bankers in Cannes, France, on Wednesday.

The Dow Jones industrial average .DJI closed down 297.05 points, or 2.48 percent, at 11,657.96. The Standard & Poor's 500 Index .SPX ended down 35.02 points, or 2.79 percent, at 1,218.28. The Nasdaq Composite Index .IXIC finished down 77.45 points, or 2.89 percent, at 2,606.96.

U.S. bank shares were lower, with the KBW bank index .BKX dropping 4 percent.

The FTSEurofirst 300 .FTEU3 index of top European shares closed down 3.4 percent, and MSCI's all-country world stock index .MIWD00000PUS lost 3.3 percent.

French banks suffered steep declines due to their heavy exposure to Greek sovereign debt. BNP Paribas (BNPP.PA) ended down 13 percent; Societe Generale (SOGN.PA) lost 16 percent and Credit Agricole (CAGR.PA) fell 12.5 percent.

Earlier, Japan's Nikkei stock index .N225 closed down 1.7 percent.

Heavy losses across global stock markets revived safety bids for German Bunds and U.S. Treasuries for a second day.

German Bund futures jumped 2.6 points to 138.12, the highest level in nearly a month, while prices on benchmark 10-year Treasury notes rose almost 1-1/2 points, pushing the yield down to 1.95 percent, the lowest in nearly a month.

In the currency market, the euro fell against the dollar to near a three-week low. The euro fell to $1.36080, its lowest since October 12 on trading platform EBS, and was last at $1.36998, down 1.1 percent.

The dollar added to its gains against the yen a day after rising to a three-month high on Japan's latest intervention. Japan sold an estimated $65 billion to $75 billion of its currency to curb its rise versus the greenback. The dollar was last up 0.15 percent at 78.31 yen.

A strengthened dollar and worries about the Greek vote spurred an initial wave of selling in oil, gold and other commodity prices. But they pared their losses as the euro recovered from its session lows.

Brent crude futures in London ended the day little changed at $109.54 a barrel, while U.S. crude futures settled down $1 at $92.19 a barrel.

Spot gold rose 0.1 percent to $1,715.49 an ounce.

(Additional reporting by Rodrigo Campos and Gertrude Chavez-Dreyfuss in New York; Amanda Cooper in London; Editing by Dan Grebler)