World stocks hit a three-month low on Thursday, the euro slumped to a one-month trough and top-rated government bonds rose as concerns intensified the lack of a deal on Greek debt might trigger disorderly market moves.
Euro zone officials are struggling to agree on how to involve the private sector in a second Greek bailout without triggering a default that would likely destabilize other euro zone weaklings.
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Investors fear mounting political turmoil in Greece, where the Prime Minister plans to form a new cabinet and will seek a vote of confidence from his fractious Socialist party to try to push through an austerity package and avoid default. Growing concerns over Greek debt restructuring and the impact on European banks from possible private sector participation come as evidence mounts that global economic growth momentum is slowing just as the Federal Reserve prepares to end its $600-billion bond buying program.
This is prompting investors to unwind their risky assets going into the thin summer months.
"The risk now is that some kind of accident happens, be it the European elements can't agree a solution ... or what happens if the Greek government falls?" said RBC rate strategist Peter Schaffrik.
The MSCI world equity index .MIWD00000PUS fell 1 percent to hit its lowest level since mid-March. The index has wiped out all the gains made this year to fall one percent since January.
The FTSEurofirst 300 index fell 0.9 percent.
Emerging stocks .MSCIEF were down 1.6 percent. Chinese stocks hit an 8-1/2 month low as speculation grew about a potential interest rate hike after the yield on three-month bills unexpectedly rose at an auction.
U.S. crude oil rose 0.4 percent to $95.21 a barrel.
Bund futures rose 37 ticks. The cost of insuring Greek debt jumped 124 basis points on the day to 1,850 bps. Credit default swaps in Ireland and Portugal also hit record highs.
The euro fell as low as $1.4088.
"There's political turmoil in Greece, and the government doesn't look too stable," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.
"The risk is increasing that Greece may not get a bailout, and this is putting pressure on the euro."
The dollar .DXY rose 0.2 percent against a basket of major currencies.
(Additional reporting by Kirsten Donovan; Editing by John Stonestreet)