Moody's slashed Greece's rating by four notches, citing macroeconomic and implementation risks in the country's draconian austerity program and reviving persistent doubts about Greece's ability to repay its debt. [ID:nN14207740]
European shares slid following falls across Asia, shifting the investor focus back to the fragility of the euro zone's finances.
This pushed world stocks <.MIWD00000PUS>, which had gained for five straight sessions, 0.4 percent lower on Tuesday.
MSCI's main emerging market stock index <.MSCIEF>, which is up around 9 percent since hitting a year low on May 25, fell 0.3 percent.
Moody's downgrade was expected as the agency caught up with main rival Standard & Poor's, which recently slashed Greece to BB-plus, but the move gave investors a reason to retreat to a more defensive stance, and sell the euro and higher yielding currencies.
The euro fell 0.2 percent against the dollar to $1.2190. The single currency saw gains of over 2 percent over the last five sessions, but is still down almost 15 percent year to date.
Yesterday we had concerns about Spain and on top of that the Greece downgrade and that is weighing on the euro now, said Johan Javeus, currency strategist at SEB in Stockholm.
The Greece downgrade highlighted that these problems are quite severe and it is difficult to see the liquidity problems in Spain improving and I think the euro will struggle going forward.
Worries about the situation in Spain increased after Treasury Secretary Carlos Ocana admitted officially for the first time on Monday that some Spanish banks were facing a liquidity freeze in the interbank market.
The higher yielding Australian and New Zealand dollars lost 0.5 and 0.4 percent respectively.
Minutes for the Reserve Bank of Australia's June policy meeting showed members had thought previous rate rises gave it time to see if Europe's troubles would hurt world growth, and to wait for more information on domestic inflation.
The yen, seen as a relatively safe bet when riskier assets retreat, gained ground. The dollar was down 0.4 percent at 91.22 yen.
Bunds also gained ground as investors sought refuge in debt perceived to be safer, while peripheral euro zone bond yield spreads widened.
The spread between Greek and German 10-year government bond yields rose to 641 basis points, 49 basis points higher than at the previous sessions close, while the spread between Irish and German government yields rose 18 basis points to 294.
Investors will closely watch the outcome of Irish bond auctions on Tuesday for the first clues on the state of demand for longer-term euro zone debt in the wake of the Moody's downgrade. Expected strong demand for two bonds may be tempered by having to pay higher yields than in recent auctions.
European shares which had seen four days of gains were lower in early trade with the FTSEurofirst 300 <.FTEU3> down 0.4 percent, with more cyclical sectors like banks <.SX7P> hit hardest.
Greece is weighing on the market. It obviously impacted the U.S. overnight so we expected the European markets to follow, said Adam Soyak, market maker at City Index. There is also a bit of profit taking after a couple days of strong gains.
Miners and energy stocks were also weaker as base metals like copper fell over 1 percent and crude fell below $75 per barrel.
(Additional reporting by Jessica Mortimer and Joanne Frearson; editing by John Stonestreet)