Greece worries hit European stocks; euro up

Wed Nov 2, 2011 6:51am EDT
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By Carolyn Cohn

LONDON (Reuters) - European stocks turned negative on Wednesday on renewed jitters about the euro zone economy and debt crisis, though world stocks and the euro held early gains ahead of a Federal Reserve meeting which may prepare markets for more monetary easing.

Greece's prime minister George Papandreou won the backing of his cabinet on Wednesday to hold a referendum on a 130 billion euro bailout package, a decision that has sent markets into a tailspin this week.

Papandreou will later face the leaders of France and Germany, who summoned him for crisis talks in Cannes, before a G20 summit of major world economies, to push for quick implementation of the bailout deal.

Rejection of the package could lead to a disorderly default for Greece with knock-on effects for European banks which hold Greek debt, a prospect which sliced more than 6 percent from the MSCI world equity index in the space of two days this week.

The referendum news wiped out all the gains made after euro zone leaders last week agreed a deal to help indebted peripheral nations.

"The fears about the fate of the banking system remain high, as Greece's membership to the European Union is in the balance. Without the bailout plan, the country will go bankrupt," Sebastien Barthelemi, analyst at Louis Capital Markets in Paris, said.

Euro zone leaders are hoping large emerging economies like China will invest in the bloc's rescue fund, the European Financial Stability Facility (EFSF).

However, China's official Xinhua news agency said in a commentary published on Wednesday that the unexpected referendum call risks creating financial panic and spreading debt problems if Greeks turn down the deal.   Continued...

<p>A man is reflected on an electronic board displaying stock prices outside a brokerage in Tokyo October 31, 2011. REUTERS/Issei Kato</p>