The Greek prime minister's call for a referendum and the possibility that the country's voters would reject the EU bailout plan sent US and European shares sharply downward Tuesday, while also taking a toll on oil prices.
Bond markets were affected by fears that Italy could be the next eurozone nation to face a debt crisis, with the yield on the country's 10-year bonds hitting 6.2 percent, close to the record reached in August.
Embattled Greek Prime Minister George Papandreou won the unanimous backing of his cabinet for a referendum on the sweeping bailout plan agreed just last Thursday, the government's spokesman said early Wednesday.
His surprise call for a vote raised the possibility that the deal would unravel, leaving Greece on the path to a default.
"Greece's referendum and various doubts about the agreement itself mean that the situation has gone back to square one," said Mitul Kotecha, strategist at Credit Agricole.
"Markets are seriously pondering a disorderly default in Greece."
Japan's finance minister said Wednesday that the referendum move had "confused people", ahead of a Group of 20 meeting in France Thursday where the issue was expected to top the agenda.
"Greece's abrupt announcement on holding a referendum, which was not included in (the earlier agreed deal), has confused people," Jun Azumi told reporters.
Taiwan's central bank governor Perng Fai-nan was more blunt, saying the move was "like throwing a bomb to financial markets," Dow Jones Newswires reported.
A Greek vote against the plan would scupper the EU deal, which is designed to cut Athens' debt load of more than 350 billion euros ($495 billion) by around 100 billion euros.
Last week's plan also agreed to recapitalise banks to withstand the impact of a 50 percent loss on their Greek bonds, as well as boost the European Financial Stability Facility rescue fund.
Wall Street plunged on Tuesday, with bank shares pulling down the broad-based S&P 500-stock index by 2.8 percent.
The blue-chip Dow Jones Industrial Average dropped 2.5 percent, while the tech-heavy Nasdaq Composite slid 2.9 percent.
The declines came even as US auto sales, a key economic driver, continued to grow in October, with Chrysler posting a 27 percent gain, while traders awaited a US Federal Reserve rate-setting meeting Wednesday and any sign of fresh stimulus measures for the US economy.
Investors were also jittery after Beijing said Tuesday that China's official purchasing managers' index (PMI) -- based on a survey of 820 manufacturers -- dropped to 50.4 in October from 51.2 in September, suggesting the global economy's main growth driver was losing steam.
In Asian trade Wednesday, Italy's benchmark 10-year bonds were yielding 6.08 percent.
On currency markets, the euro fetched $1.3713 and 107.24 yen in Tokyo trade compared with $1.3697 and 107.29 yen late Tuesday in New York.
The single currency tumbled as low as $1.3609 overnight, its lowest level since October 12 and well below the $1.42 level it reached last week after the eurozone debt plan was announced.
The dollar edged down to 78.18 yen from 78.34 yen, off rates above 79.00 yen in Tokyo on Monday after Japan's first yen-selling intervention since August.
The Australian dollar was also lower, trading at 103.08 US cents from 104.36 late Tuesday.
New York's main oil contract, light sweet crude for delivery in December, was down 74 cents to $91.45 in morning Asian trade. Brent North Sea crude for December settlement tumbled 59 cents to $108.95. At 0230 GMT gold, considered a safe haven during times of economic uncertainty, was higher at $1,724.27 an ounce against $1,718.65 late Monday. For the latest updates on the stock market, visit Stock Market Today
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