US stocks add to a blobal selloff as Greece veers toward default

NEW YORK: 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, and the European Central Bank froze funding to Greek banks, forcing Athens to shut them for a week to prevent them from collapsing.

Thousands rallied behind a "No" vote in a referendum called for next Sunday on the terms of an aid deal offered to Greece by its creditors.

Talks between Athens and its creditors broke down over the weekend after Prime Minister Alexis Tsipras called the surprise referendum.

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.

"Could (the market) reverse itself tomorrow? It's going to take a lot of good news from Greece," said Michael  James, managing director of equity trading at Wedbush Securities in Los Angeles. "There are many factors playing into increased nervousness today through the rest of this week," he said.

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 39.1 percent to 19.5 points, the highest since early February. It closed up 34.5 percent at 18.86.

"When you don't know what could happen, you sell. You get on the sidelines," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago.

The Dow Jones industrial average <.DJI> fell 350.33 points, or 1.95 percent, to 17,596.35, the S&P 500 <.SPX> lost 43.85 points, or 2.09 percent, to 2,057.64 and the Nasdaq Composite <.IXIC> dropped 122.04 points, or 2.4 percent, to 4,958.47.

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 3.8 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 , which tracks the Athens stock market, fell 20 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 GAINS ON USD

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 some investors unwound trading positions by buying the euro, according to traders.

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 against the bloc's single currency.

The yen strengthened 1.1 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 rose 1-9/32 in price to yield 2.3296 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 pared a gain of more than 1 percent on the day to trade up 0.4 percent near $1,178 an ounce.

Brent crude was down 2 percent at $62 a barrel and U.S. crude fell 2.3 percent $58.24 a barrel.

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