Greece's admission that it will miss its deficit targets this year and next despite harsh new austerity measures sent stock markets reeling Monday and raised new doubts over a planned second international bailout.

Major European market indexes were down more than 2 percent.

The gloomy news from Athens brought the specter of a debt default closer and will weigh on talks among euro zone finance ministers in Luxembourg later Monday on the next steps to try to resolve the currency area's sovereign debt crisis.

European bank shares suffered the heaviest falls on fears that private sector bondholders may be forced to absorb bigger losses than agreed in a July rescue plan for Greece, which was based on more optimistic growth forecasts.

 Belgian and French finance ministers will meet on Monday to discuss ways to shore up the balance sheet of troubled Franco-Belgium group Dexia (DEXI.BR), which has one of the largest exposures to Greece among non-Greek banks, according to a French daily Les Echos report.

Following an already weak U.S. close on Friday, news over the weekend that Greece will fail to reach their required deficit goals is set to keep sentiment negative, said Jonathan Sudaria, dealer at Capital Spreads.

Traders will be concerned that the bailout packages and strict austerity measures imposed on Greece are still failing to get the debt situation under control or spark any growth.

The MSCI world equity index fell 1.4 percent, approaching a 14-month low set in September.

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.

On European stocks markets the FTSE fell 2.4 percent while emerging stocks lost 2.8 percent.

U.S. crude oil fell 2 percent to $77.66 a barrel.

Bund futures gained 87 ticks.

The dollar .DXY rose 0.6 percent against a basket of major currencies.

The yen rose 0.4 percent to 76.77 yen while the euro fell 0.1 percent to $1.3324.

 Draft budget figures issued Sunday showed the deficit would be 8.5 percent of gross domestic product this year, well above the 7.6 percent agreed in Greece's EU/IMF bailout program, and 6.8 percent in 2012, short of the 6.5 percent goal because the economy will shrink further.

Deputy Finance Minister Pantelis Oikonomou played down the shortfall, saying European Union and International Monetary Fund inspectors had essentially concluded negotiations to give Greece a crucial 8 billion euro installment of aid this month to avert bankruptcy.

However, a source familiar with the review by the troika of international lenders said the talks were not over, and the inspectors were still examining both the budget numbers and other reforms required for the loan disbursement.

The 17 euro zone ministers will not take any decision on Monday on releasing the funds, needed to pay October salaries and pensions, since the troika has yet to report back. They are set to decide at a special meeting Oct. 13.

The disclosure that Greece's funding needs next year will be greater than forecast when a second 109 billion euro rescue package was agreed in principle in July reopened a fraught battle over who should pay -- taxpayers or financiers.

Deutsche Bank chairman Josef Ackermann, head of the International Institute of Finance, which negotiated a voluntary bond-swap by investors as part of the bailout plan, warned at the weekend against changing the terms now.

If we reopen the voluntary accord of July 21, we will not only lose precious time but quite possibly also private investor support, Ackermann told the Sunday edition of Greek newspaper Kathimerini.

The impact of such a move will be incalculable. This is why I am warning in the most forceful way against any material revision, he said.

Private bondholders agreed to a 21 percent write-down on their Greek debt holdings,, but EU and German officials have suggested the haircut may have to be increased in light of the new funding shortfall and changed market conditions.

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.

Political resistance to pouring more public money into euro zone bailouts is growing across northern Europe.

Greece is bankrupt, said Michael Fuchs, a deputy parliamentary floor leader in German Chancellor Angela Merkel's Christian Democrats, reflecting a growing mood in Berlin.

Probably there is no other way for us other than to accept at least a 50 percent forgiveness of its debts, Fuchs told the Rheinische Post newspaper.


Uncertainty over the extent of damage to the already fragile European banking sector from a possible Greek default has been driving investors to take refuge in safer assets.

Yields on Spanish and Italian government bonds rose and the cost of insuring their debt against default spiked on the news from Greece, while money poured into safe-haven German Bunds. The euro also fell to an eight-month low in Asia.

The markets continue to conclude that a default for Greece is an inevitability and a question of when rather than if, said Nick Stamenkovic, strategist at RIA Capital Markets.

The euro zone ministers were expected to discuss ways to leverage their EFSF bailout fund, without reaching a conclusion on Monday, and put more pressure on Greece to implement agreed structural reforms and privatizations to try to get its economy growing again.

We will be pressing the Greek finance minister to do some more tough talking about the implementation of reforms at home, said one euro zone official involved in the preparation of the meeting. Greece would be well advised not only to announce but also to implement reforms.

The Greek government expects the economy to contract by 5.5 percent this year and a further 2.5 percent in 2012, when the original rescue plan anticipated a return to modest growth.

The projections illustrate a vicious spiral of recession, falling government revenues, soaring unemployment and declining consumer purchasing power into which Greece has fallen.

Officials expect the next aid tranche will be paid, because the euro zone will not be ready to cope with the fallout of a Greek default until its bailout fund, the European Financial Stability Facility, gets its new powers of market intervention ratified in the next two weeks.

Even then, however, while the 440 billion euro fund will be able to buy government bonds from the market, recapitalize banks and extend precautionary credit to sovereigns, it may not have enough cash to cope with all the financing needs.

The leveraging idea, suggested by the United States, has opponents in north European creditor countries, who fear it could lead to bigger liabilities beyond the 780 billion euros in current EFSF guarantees, or credit rating downgrades for either the AAA-rated rescue fund or its triple-A guarantors.

Among the ideas under consideration is allowing the EFSF to refinance itself at the ECB's liquidity operations for banks. The EFSF could also guarantee to cover a percentage of potential losses investors could incur in case of a hypothetical sovereign default.

Any solution, however, should not require another round of ratification, officials said, because policymakers realized how difficult and lengthy the process was given the growing opposition to bailouts in many euro zone countries.

(Additional reporting by Ingrid Melander and Lefteris Papadimas in Athens, William James in London,; Writing by Paul Taylor, editing by Mike Peacock)