U.S. Stocks Post Worst Day of the Year on Greece Uncertainty

A trader looks at computer screens at Madrid's bourse, Spain, June 29, 2015. European stock markets slid lower on Monday, with southern European banks hit particularly hard, after Greece closed its banks and imposed capital controls. Susana Vera/Reuters

NEW YORK (Reuters) - U.S. stocks added to a global selloff on Monday as Greece veered toward a default on its debt, while the euro recovered from an early sharp loss to turn higher against the dollar.

Greece will not pay a 1.6 billon euro loan installment due the International Monetary Fund on Tuesday, a Greek government official told Reuters, while thousands rallied behind a 'No' vote in a referendum called for next Sunday on the terms of an aid deal offered by Greece's international creditors.

Talks between Athens and its creditors broke down over the weekend after Prime Minister Alexis Tsipras called a surprise referendum on the austerity cuts in an aid package proposed by Greece's creditors. Tsipras late on Sunday announced moves to prevent a collapse of the banking system.

European stocks closed near their session low but the euro recovered from a drop of as much as 1.9 percent and was trading positive against the dollar.

The CBOE Volatility index <.VIX>, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped as much as 34.3 percent to 18.83 points, the highest since early February. It was last up 33.8 percent at 18.76.

"It is hard to come up with what the percentage stock decrease should be to account for what outcome," said Paul Zemsky, chief investment officer, Multi-Asset Strategies and Solutions, at Voya Investment Management in New York.

"Global contagion doesn't seem as likely," he said, although he added that it often occurs on links unseen.

Until late last week, investors were hopeful that an 11th-hour deal would prevent a Greek default and that the impact on other markets from a possible default would be minimal.

The Dow Jones industrial average <.DJI> fell 294.51 points, or 1.64 percent, to 17,652.17, the S&P 500 <.SPX> lost 36.96 points, or 1.76 percent, to 2,064.53 and the Nasdaq Composite <.IXIC> dropped 106.56 points, or 2.1 percent, to 4,973.95

The pan-European FTSEurofirst 300 <.FTEU3> index closed down 2.8 percent, the most since mid-October. The index had fallen as much as 3.2 percent. U.S. dollar-denominated Nikkei futures fell 3.6 percent.

Greek banks and the stock market were closed on Monday and were expected to remain closed until after the July 5 referendum. The planned vote would decide whether to accept stronger austerity measures demanded by Athens' creditors.

The Global X FTSE Greece exchange-traded fund <grek.k>, which tracks the Athens stock market, was down 18.6 percent. Euro zone banks <.SX7E> fell 5.8 percent.

Adding to the gloomy backdrop, China shares continued to slide, with central bank cuts in interest and reserve rates on Saturday failing to calm jittery investors. [.SS]

The Shanghai Composite <.SSEC> fell 3.3 percent, bringing the losses in the past two weeks to more than 21 percent. Hong Kong's Hang Seng <.HIS> fell 2.6 percent on the day.EURO REVERSES SHARP LOSS

The euro fell overnight to as low as $1.0953, off 1.9 percent versus the U.S. dollar, but reversed near the mid-session in New York to trade up 0.6 percent at $1.1232.

The single currency rose as shorts closed positions as part of a move away from risk.

It is a "classic risk aversion effect," said Ruggero de Rossi, head of emerging markets fixed income at Federated Investors in Pittsburgh.

"Paradoxically, there is some possibility the referendum can yield a 'yes.' Should you be short euro? That is something people may be asking themselves."

The euro earlier drew support from the Swiss National Bank, which confirmed it had intervened to counter gains for the franc <eurchf=> against the bloc's single currency.

The yen <jpy=> strengthened 1 percent versus the greenback.

Despite the declines in the dollar, Greek fallout in the United States was not expected to be enough to throw the Federal Reserve's likely September rate hike off course.

Benchmark U.S. Treasury yields fell to one-week lows on Monday, with some traders flocking to U.S. debt as a risk-off move on worries about the impact of a Greek default on global financial markets.

The 10-year Treasury note <us10yt=rr> rose 1-10/32 in price to yield 2.3242 percent, after earlier hitting 2.292 percent, the lowest in a week.

Government borrowing costs in Europe's indebted southern countries shot up on worry about possible contagion from the Greek developments.

However, borrowing costs in Italy, Spain and Portugal were still less than half the levels seen in late 2011 and early 2012 at the height of the most recent debt crisis.

Spot gold <xau=> pared a gain of more than 1 percent on the day to trade up 0.4 percent near $1,179 an ounce.

Brent crude was down 2.2 percent at $61.89 a barrel and U.S. crude fell 2.4 percent $58.21 a barrel.

Adding to the risk-aversion sentiment due to Greece, Iran looked likely to extend nuclear negotiations with the West to export more of its oil to the market.