EUROZONE DELAYS DECISION ON NEXT GREECE PAYOUT
It came after Greece said it would not meet this year's deficit cutting plan.
A meeting set for 13 October, when finance ministers had been expected to sign off the next Greek loan, has now been cancelled, said BBC Europe correspondent Chris Morris.
French shares fell 2.8%, German stocks by 3.5%, and the UK's FTSE by 2.8%.
As a result of the decision by finance ministers, Greece may not get its next loan tranche until November.
Its Finance Minister, Evangelos Venizelos, said that should not cause any difficulties as the Greek government had no funding problem until November.
Greece had previously said it needed the money by mid-October to avoid defaulting on its loans, but Eurogroup chairman Jean-Claude Juncker said at a meeting of finance ministers in Luxembourg that the country would be able to meet its financial obligations as long as it received the next 8bn-euro (£6.9bn; $10.9bn) tranche of money in November.
Mr Juncker also ruled out the possibility of a debt default by Greece – denying rumours that some countries, including Germany, had been pushing for this.
But he warned that Greece's private sector creditors could expect greater losses on their Greek sovereign debt holdings than the 21% “haircut” agreed in July.
The private sector agreed to participate in a second bailout of Greece, with the eurozone and IMF providing 109bn euros in new funds.
Mr Juncker said: “As far as PSI [private sector involvement] is concerned, we have to take into account that we have experienced changes since the decision we have taken on 21 July.”
The meeting also appeared to reach a deal to let Finland receive collateral as security for its contribution towards the eurozone bailout fund – the European Financial Stability Facility.
Mr Venizelos said Greece would offer Finland 880m euros of bonds as loan collateral.
Finland's Prime Minister, Jyrki Katainen, said the collateral model it would use to take part in Greece's bailout package would be useful in other possible aid packages in the future.
Mr Katainen told reporters: “This model is a good one… I think it could be used in future as well.”
The Finns had threatened to block further bailouts to Greece unless it received this special arrangement.
Banking stocks were again among the biggest fallers, due to concerns about their exposure to Greek government bonds.
In France, Societe Generale was 7% lower, while BNP Paribas had lost 6.3%, and Credit Agricole had fallen 5.9%.
German's Commerzbank was down 5.7%, while in the UK Lloyds Banking Group had shed 4.2%.
Meanwhile, the Franco-Belgian bank Dexia, the bank the market judges most vulnerable to Greece, saw its shares tumble around a quarter to around 1 euro (86p).
Dexia is holding an emergency board meeting amid serious concerns, while the governments of France and Belgium, which are joint shareholders in Dexia, moved to guarantee its debts.
The euro fell to a 10-year low against the yen and slipped against the dollar to $1.3144, a nine-month low.
Jane Foley, strategist at Rabobank, said: “The market is increasingly worried about the potential of the Greek crisis and the calamity that could be created if there was a messy default.
“Dexia's problems stress the point that for eurozone leaders the Greek crisis is less about Greece and more about the potential for it to spark a much more widespread banking and economic disaster.”
On Monday, Athens announced that the 2011 deficit was projected to be 8.5% of GDP, down from 10.5% in 2010 but short of the 7.6% target set by the EU and IMF.
The government, which on Sunday adopted its 2012 draft austerity budget, blamed the shortfall on a worsening economy, which is expected to contract by 5.5% rather than the 3.8% forecast in May.
Data released on Tuesday showed the effects of the austerity programme on household spending.
Greek retail sales fell 4.3% in the year to July, although the figure was far worse in June when sales were 11.4% lower year on year.
Inspectors from the International Monetary Fund (IMF), European Union (EU) and European Central Bank are currently in Athens to examine Greece's financial position.
The Greek finance ministry said on Sunday that its unpopular austerity measures would have to be adhered to.
It said: “Three critical months remain to finish 2011, and the final estimate of 8.5% of GDP deficit can be achieved if the state mechanism and citizens respond accordingly.”
It released figures for 2012′s projected deficit, putting it at 6.8% of GDP, also short of the 6.5% target.
The data came as the government met to approve Greece's draft budget for next year.
3 Oct: Original deadline for Greece to receive next 8bn-euro tranche of bailout funds;
Next few days: Troika decides whether to recommend that Greece gets the next tranche;
9 Oct: Leaders of Germany and France to hold talks;
14-15 Oct: G20 finance ministers meet in Paris;
17 Oct: Slovakia votes on whether to expand the European Financial Stability Facility. Members of the coalition government have vowed to block expansion;
17-18 Oct: European Union summit in Brussels;
End of Oct: Greece to get next bailout money – assuming no more hurdles;
3-4 Nov: G20 summit in Cannes, France. World leaders, including Barack Obama, want evidence that Europe have got control of debt crisis
The cabinet meeting also approved a measure to put 30,000 civil service staff on “labour reserve” by the end of the year.
This places them on partial pay with possible dismissal after a year.
This measure, along with other wage cuts and tax rises, have been part of a package intended to persuade the so called “troika” of the EU, IMF and ECB to continue with the bailouts.
The Greek austerity measures are hugely unpopular at home and have led to a wave of strikes and protests.
Protesters again blocked the entrance to several ministries on Tuesday, including the Finance and Transport ministries.
Many Greeks believe the austerity measures are strangling any chance of growth.