European stocks turned negative on Wednesday on renewed jitters about the euro zone economy and debt crisis, though world stocks and the euro held early gains ahead of a Federal Reserve meeting which may prepare markets for more monetary easing.
Greece's prime minister George Papandreou won the backing of his cabinet on Wednesday to hold a referendum on a 130 billion euro bailout package, a decision that has sent markets into a tailspin this week.
Papandreou will later face the leaders of France and Germany, who summoned him for crisis talks in Cannes, before a G20 summit of major world economies, to push for quick implementation of the bailout deal.
Rejection of the package could lead to a disorderly default for Greece with knock-on effects for European banks which hold Greek debt, a prospect which sliced more than 6 per cent from the MSCI world equity index in the space of two days this week.
The referendum news wiped out all the gains made after euro zone leaders last week agreed a deal to help indebted peripheral nations.
"The fears about the fate of the banking system remain high, as Greece's membership to the European Union is in the balance. Without the bailout plan, the country will go bankrupt," Sebastien Barthelemi, analyst at Louis Capital Markets in Paris, said.
Euro zone leaders are hoping large emerging economies like China will invest in the bloc's rescue fund, the European Financial Stability Facility (EFSF).
However, China's official Xinhua news agency said in a commentary published on Wednesday that the unexpected referendum call risks creating financial panic and spreading debt problems if Greeks turn down the deal.
The Xinhua piece does not necessarily represent the official view of Beijing. But it showed that cash-rich China, which is being courted by Europe to contribute to the bailout plan, is deeply wary of the euro sovereign debt crisis.
In a further sign of lack of market confidence in the rescue deal, launch of an EFSF 10-year bond was no longer expected to go ahead today, one of the lead managers told Thomson Reuters news service IFR.
In addition, the downturn in euro zone manufacturing in October was even deeper than previously reported, according to business surveys on Wednesday.
European stocks fell 0.3 per cent, with European banks Banco Popolare and BBVA suffering steeper losses.
World stocks and the euro rose 0.5 per cent, however, as investors looked to the Federal Open Market Committee later on Wednesday.
The FOMC could begin to prepare financial markets for further monetary easing, even if it refrains from any new stimulus just yet. .
The dollar fell 0.35 per cent against a basket of currencies and 0.3 per cent against the yen to 78 .
Japan sold a record of nearly $100 billion worth of yen on Monday, driving the greenback from a record low of around 75.31 yen to a high of 79.55 yen.
Brent crude oil rose 0.26 per cent to $109.80 a barrel.
Bund futures fell 41 ticks to 137.74 after nearly three full points of gains in the previous session.