Stocks took a hammering Monday as Greece struggled to convince international creditors that it can meet its debt obligations in return for more bailout cash to avoid running out of funds as soon as next month.
Even though Prime Minister George Papandreou canceled a trip to the United States and the Greek cabinet came up with fresh austerity measures over the weekend, investors remain concerned that Greece will not get its hands on the euro8 billion ($11 billion) due from last year'seuro110 billion ($150 billion) bailout.
On Friday, eurozone finance ministers in Poland decided to delay authorizing the payout to Greece until early October. At risk is not only the installment from the 2010 rescue package but also a second bailout for Greece worth euro109 billion ($149 billion).
"(The Poland meeting) seemed to highlight the level of disunity amongst those that have the authority to deal with the problem," said Louise Cooper, markets analyst at BGC Partners. "The slow machinations of the political class are just not keeping up with the economic and financial reality on the ground."
Greece's finance minister, Evangelos Venizelos, is due to host a teleconference later Monday with the country's international creditors: the European Commission, the European Central Bank and the International Monetary Fund. His task is to convince them that Greece is doing enough to warrant the release of the next batch of bailout cash.
While investors keep a close watch on the internal debate in Greece, they are also monitoring developments in Germany after Chancellor Angela Merkel's government suffered a big electoral defeat in Berlin, which shut out her Free Democratic party coalition partners from a regional parliament.
Amid the uncertainty and after strong gains last week, stocks started the week in retreat.
In Europe, Germany's DAX was down 3.4 percent at 5,385 while France's CAC-40 fell 3.2 percent to 2,934. The FTSE 100 index of leading British shares was 2.2 percent lower at 5,249.
In the U.S., the Dow Jones industrial average was down 1.7 percent at 11,314 while the broader Standard & Poor's 500 index fell 1.8 percent to 1,193.
Aside from Greece, the other main focus in the markets this week is Wednesday's monetary policy decision from the U.S. Federal Reserve. There are growing expectations that the central bank will introduce some new measures to help boost the U.S. economy, which has seen growth slow down sharply this year. However, most analysts think the Fed will fall short of announcing another monetary stimulus program, given that inflation levels remain relatively elevated.
"Many still expect some sort of central bank assistance to be announced at this week's Federal Reserve meeting, but the ongoing concerns over a Greek default are likely to overshadow this unless there is some sort of firm reassurance that this can be avoided," said Ben Critchley, a sales trader at IG Index.
With stocks under pressure, the dollar garnered some support against the euro through its supposed status as a safe haven asset in times of financial volatility. The euro, which has shed a large chunk of last week's gains after the failure of European finance ministers to unveil anything dramatic with Greece, was 0.5 percent lower at $1.3613.
"The dollar has started the new week on a firm footing, with financial markets somewhat uncertain about the next steps in the European debt market crisis," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.
Earlier in Asia, Hong Kong's Hang Seng index plunged 2.8 percent to 18,917.90, while South Korea's Kospi index fell 1 percent at 1,820.94. China's main index in Shanghai ended 1.8 percent lower at 2,437.79.
Japanese financial markets were closed Monday for a national holiday.
In the oil markets, prices tracked equities lower _ benchmark oil for October delivery was down $2.28 at $85.68 in electronic trading on the New York Mercantile Exchange.