World stocks hit a fresh 15-month low Tuesday while the dollar neared a nine-month peak on growing doubts over Greece's ability to avert a default that would spark a major banking crisis in Europe and accelerate a global economic slowdown.
In a meeting in Luxembourg, euro zone finance ministers said they were reviewing the size of the private sector's involvement in a second bailout package for Greece, a move that threatens to hasten a default.
Ministers also agreed that Greece could wait until mid-November for the next loan installment from the existing emergency aid program, putting further pressure on Athens to get to grips with its debt problems.
While many in the market expect Greece to default at some point, the impact on an already fragile banking sector is still not fully priced in. Franco-Belgian bank Dexia fell as much as 31 percent on Tuesday on top of its 10 percent fall on Monday, as worries about its heavy exposure to Greece grew.
What you're now beginning to see is they (investors) are now picking out the banks. Dexia is the weakest, said Justin Urquhart Stewart, director at Seven Investment Management.
Politicians have to stand behind these banks -- whether you call it state support, nationalization, you have to keep the financial system working otherwise we will end up with another credit crisis.
The MSCI world equity index <.MIWD00000PUS> fell 1 percent, hitting its lowest since July 2010. The index has fallen more than 18 percent since January and more than 24 percent since hitting a three-year high in March.
Dexia vowed to fix its balance sheet after Moody's placed the group on a review for a possible downgrade, warning about its liquidity. According to a Belgian newspaper report on Tuesday, Dexia could be split up and its 'good' assets sold by the end of 2011.
European stocks <.FTEU3> lost 1.5 percent while emerging stocks <.MSCIEF> fell 1.4 percent to hit its lowest since September 2009. European banking shares <.SX7P> fell 2.3 percent.
U.S. crude oil fell 1.1 percent to $76.78 a barrel.
Bund futures rose 81 ticks.
The dollar <.DXY> rose 0.1 percent against a basket of major currencies, holding near a nine-month high.
The euro fell as low as $1.3174, a nine-month trough, before erasing losses.
(Reporting by Natsuko Waki; Editing by John Stonestreet)