Stocks, euro hit by Greek worries

Riot police stand guard in front of the parliament during a protest against austerity measures in Athens February 9, 2012.

NEW YORK (Reuters) - Stocks snapped a five-week winning streak on Friday and the euro slumped as planned wage and pension cuts in Greece hit a new obstacle, raising fear the country may not get the aid it needs to avoid a messy default.

The leader of the smallest party in Prime Minister Lucas Papademos' coalition government said he could not vote in favor of a 130-billion-euro bailout agreement Greece needs to avoid default in March.

Although the party has only 15 deputies out of 300, its resistance drove nervous investors to sell the euro and stocks, sending the benchmark Standard & Poor's 500 Index to its first weekly decline in the past six.

The euro retreated from Thursday's two-month high above $1.33, gold and commodities fell and investors took refuge in U.S. government bonds. In late New York trading, the euro was down 0.8 percent at $1.3175.

"It's not entirely surprising to see negative news overnight trigger a pretty sharp unwinding of risk," said Omer Esiner, chief analyst at Commonwealth Foreign Exchange in Washington.

"A lot of the uncertainty that has hung over markets for the better part of the last year remains largely in place," he said. "This is a dose of reality for people."

Indeed, stocks have climbed some 7 percent over the last six weeks, capping off a 25 percent rally seen over four months. Optimism hit a crescendo Thursday on hopes Greece would soon receive an second bailout to stave off a default.

But selling was broad on Friday. Declining issues outpaced advancing shares by almost 4 to 1 among New York Stock Exchange-listed shares. The CBOE Volatility index .VIX, a measure of volatility known as investors' "fear index," spiked more than 12 percent, its biggest jump in three months.

Based on the latest data, the Dow Jones industrial average .DJI unofficially closed down 89.31 points, or 0.69 percent, at 12,801.15. The Standard & Poor's 500 Index .SPX fell 9.33 points, or 0.69 percent, at 1,342.62. The Nasdaq Composite Index .IXIC fell 23.35 points, or 0.8 percent, at 2,903.88.

GREECE HOPES FADE AGAIN

A pre-weekend scramble for safety reversed the previous day's decline in government debt prices.

"It's all about Greek headlines now. Generally speaking, investors don't like being short Treasuries when these things are going on," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment.

The benchmark 10-year note rose 20/32 in price to yield 1.97 percent. The yield on the 30-year bond slipped to 3.12 percent after hitting 3.23 percent on Thursday, its highest since late October. Yields move inversely to prices.

Earlier, euro zone finance ministers gave a lukewarm response to an inter-party agreement from Athens on austerity measures and set more conditions for Greece to secure a second bailout needed to ensure it can meet debt repayments next month.

That left the Greek rescue deal in limbo and tempered some of the enthusiasm seen a day ago after Greek political leaders clinched an agreement on austerity after weeks of talks.

"Markets seem to have had enough of it for now," said Credit Agricole rate strategist Orlando Green. "It may just be kicking the can down the road again as debt is in unsustainable territory and whether they (Greece) can deliver something long lasting is another question."

The FTSEurofirst 300 .FTEU3 index of top European shares fell 0.9 percent to close of 1,064.05.

Earlier, Asian stocks also lost ground, pushing global stocks as measured by MSCI's all-country world equity index .MIWD00000PUS down 1.3 percent at 323.89.

Still, the index is up more than 20 percent from its October trough as low interest rates from major central banks and a huge cash injection by the European Central Bank fueled a rally in stocks, commodities and higher-yielding currencies.

BACK TO THE DRAWING BOARD

The Greek plan agreed by Athens has fallen short of targets needed to bring its debt down to a more sustainable level.

Jean-Claude Juncker, who chairs the group of euro zone finance ministers, said the Greek parliament must ratify the austerity package when it meets on Sunday and said a further 325 million euros of spending cuts needed to be put in place by Wednesday.

Facing elections as soon as April, Greek political leaders are loath to accept tough measures with rising social unrest and mounting unemployment compounding the country's woes.

Data showing China's trade activity slowed sharply last month also dulled risk appetite, raising concern about whether demand is strong enough to make for a decline in Chinese exports.

That sapped the strength of growth-linked currencies such as the Australian dollar and commodities such as copper and oil slipped.

Another drag on oil prices: The International Energy Agency cut its oil growth demand forecast for a sixth consecutive month due to a weak global economy, though declines were capped by political tensions over Iran.

U.S. crude fell $0.82 to $99.01 a barrel.

Spot gold fell 0.9 percent to $1,715.99 an ounce.

(Additional reporting by Neal Armstrong and Kirsten Donovan in London; Editing by James Dalgleish)