GLOBAL MARKETS-Stocks, euro fall on Greece exit worries
* World shares sink on fears over Greece exit from euro
* Doubts over debt-crisis plan send euro to 21-month low
* Germany sells interest-free debt due to safety bids
NEW YORK, May 23 (Reuters) - World stocks and the euro fell o n W ednesday as investors shunned riskier assets on worries about Greece's possible departure from the euro zone, which would deepen the region's debt crisis and hurt an already fragile global economy.
Each euro zone country will have to prepare a contingency plan for the eventuality of Greece leaving the single 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 a new two-year debt issue amid the absence of new measures from a European leaders' summit in Brussels to tackle the region's debt crisis.
"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 are expected to discuss boosting growth at a meeting later o n W ednesday, 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 head of the euro zone's most powerful member and leaders of other bloc countries unleashed selling of their common currency and shares worldwide.
The MSCI world equity index tumbled 1.7 percent to 298.10, close to the lowest level of the year set last week.
The Dow Jones industrial average was down 131.46 points, or 1.05 percent, at 12,371.35. The Standard & Poor's 500 Index was down 12.49 points, or 0.95 percent, at 1,304.14. The Nasdaq Composite Index was down 20.65 points, or 0.73 percent, at 2,818.43.
The FTSE Eurofirst index of top European shares lost 1.9 percent to 974.42, while the Nikkei index shed 2 percent to 8,556.60.
The euro fell 0.3 percent to 1.2643 after touching $1.2613, its lowest level since August 2010.
The dollar index rose 0.3 percent to 81.74 after touching 81.91, its highest since September 2010.
"The euro's downtrend is entrenched and we think there are too many risks of potentially nasty outcomes in the euro zone, especially with regard to what will happen to Greece," said Ned Rumpeltin, currency strategist at Standard Chartered in London.
Fears about a Greek exit from the euro were stoked by former Prime Minister Lucas Papademos, who said late o n T uesday that Greece had no choice but to stick with a painful austerity program or face a damaging exit from the euro zone.
Papademos' comments fed bidding for German and U.S. government debt as investors sought low-risk investments.
The strong German Schatz auction lifted June Bund futures 91 ticks to 144.00, while benchmark U.S. Treasury yields were around 1.72 percent, within striking distance of the lowest level at least 60 years.
In the oil markets, 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.
Brent last traded down $1.53 at $106.88, while U.S. oil futures fell 73 cents to $91.12 a barrel.
Spot gold prices fell for a third straight session, down 1 percent to $1,550.01 an ounce.
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