At traders IG Index in London, chief market strategist David Jones said the referendum decision “is a shock to investors who thought that we were finally nearing the end” of the region's debt crisis. - AFP photo

LONDON: Global stock markets plunged Tuesday after Greece announced a referendum on its latest bailout deal, agreed only last week, putting the hard won accord in jeopardy and Europe in uncharted waters.

Dealers said the announcement late Monday by Greek Prime Minister George Papandreou completely trumped any idea the Greek debt issue could be resolved gradually, so allowing the rest of the eurozone to put its house in order.

The news was even more troubling as it followed weak Asian manufacturing growth data, especially in China, the world's number two economy, which further clouded an already very uncertain outlook.

“The wheels look set to fall off the European bailout effort as the Greek prime minister's call for a referendum sent the market into a tail spin,” said ETX Capital trader Manoj Ladwa in London.

The markets have tumbled as investors begin “to factor in an ever increasingly likelihood of a Greek default,” Ladwa said.

In London, the benchmark FTSE-100 index of top companies lost 2.21 percent to 5,421.57 points -- but even this sharp loss was better than most others.

In Paris, the CAC-40 slumped 5.38 percent to 3,068.33 points and in Frankfurt, the DAX-30 was down 5.0 percent to 5,834.51 points.

Milan tumbled 6.8 percent and Madrid fell 4.19 percent while Athens, the epicentre of the latest crisis, dropped 6.82 percent.

Italy was especially under pressure as investors looked to cash out at all costs amid increasing fears Rome will need outside help to get through its debt crisis.

The impasse between Prime Minister Silvio Berlusconi and his coalition partner the Northern League makes the situation worse, forcing Italian borrowing costs toward dangerously high levels Tuesday.

The yield on Italian 10-year bonds rose to around 6.2 percent -- close to its record of 6.397 percent reached in August, reflected growing nerves over the outlook for Rome.

“We all known that when our borrowing rate is close to seven percent our debt risks becoming unsustainable. The situation is extraordinarily serious,”Nicola Rossi, an opposition senator and economist, told news channel SkyTG24.

“The problem is that Italy is the weak link in the euro chain so we are under particular scrutiny,” he said.

The euro fell sharply to $1.3706 from $1.3851 in New York late Monday but was off its lows.

In New York, the blue-chip Dow Jones Industrial Average, which fell more than two percent on Monday, tumbled 2.19 percent and the tech-heavy Nasdaq Composite shed 2.62 percent, extending early losses.

Fred Dickson at DA Davidson & Co. said Papandreou's announcement threw global markets into turmoil, less than a week after the EU bailout and reform plan unveiled Thursday sparked a massive relief rally.

“It is unclear what happens if the Greek people vote down the reforms required for the current round of bailout funds from the International Monetary Fund and the European Central Bank,” he said.

The latest twist in the debt crisis saga comes as leaders of the world's 20 biggest economies get ready for a summit in France on Thursday and Friday where they hope to pool efforts so as to keep the global economy on track.

After last week's eurozone debt deal, the mood turned much more positive but the Greek turnabout risks creating even more turmoil, dealers said.

“Clearly, from the perspective of financial markets, the (referendum) news increases the risk of a disorderly Greek debt default as well as increasing the probability that France and Germany lose patience with Greece thus forcing a Greek exit from monetary union,” said VTB Capital analyst Neil MacKinnon.

At traders IG Index in London, chief market strategist David Jones said the referendum decision “is a shock to investors who thought that we were finally nearing the end” of the region's debt crisis.

“It raises the prospect of the crisis dragging on further still, continuing the uncertainty for stock markets. Not surprisingly, some of the biggest casualties ... are the banks.”In Asian trade earlier Tuesday, Tokyo fell 1.70 percent, Hong Kong dropped 2.49 percent lower and Sydney lost 1.52 percent.