World stocks hit a fresh 15-month low on Tuesday and the dollar rose to a nine-month peak as fears over a major banking crisis in Europe mounted along with expectations Greece could soon default, accelerating a global economic slowdown.

Sovereign debt insurance costs for the region's economic powerhouse Germany hit a record high after euro zone finance ministers said they were reviewing the scale of private sector involvement in a second bailout package for Greece, a move that threatens to hasten a default.

At their meeting in Luxembourg, the ministers also agreed Greece could wait until mid-November for the next installment from the existing 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 was still not fully priced in.

European banking shares <.SX7P> fell 4.2 percent, with Dexia shedding as much as 37 percent on top of its 10 percent fall on Monday, as worries about the Franco-Belgian bank's 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.

Expectations the region's paymasters in Berlin will have to fork out increasing amounts of money to bail out weaker elements within the euro zone sent the cost of insuring German debt against default to record highs, with the country's five-year CDS rising to 121 bps.

Debt insurance costs for Belgium and peripheral euro zone states also rose.


The MSCI world equity index <.MIWD00000PUS> fell 1.5 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, whose shares hit a record low, 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.

France and Belgium, working with central banks, said on Tuesday they would take all measures necessary to protect Dexia's account holders and creditors.

European stocks <.FTEU3> lost 2.6 percent while emerging stocks <.MSCIEF> fell 2 percent to hit their lowest since September 2009.

U.S. crude oil fell 1.1 percent to $76.78 a barrel.

Bund futures rose 88 ticks.

Belgium's five-year credit default swaps rose 14 basis points to 286 bps, close to a Sept 22 record high.

The dollar <.DXY> rose 0.4 percent against a basket of major currencies to a fresh nine-month high. The euro fell as low as $1.3144, a nine-month trough.

The tone for the euro is sour after the failure of the euro zone finmins to bring anything concrete to the table with respect to Greece, said Jane Foley, senior currency strategist at Rabobank.

The market is increasingly worried about the potential of the Greek crisis and the calamity that could be created if there was a messy default.

(Editing by John Stonestreet)