World markets slump on Greek vote shock

World sharemarkets dropped overnight after Greek Prime Minister George Papandreou sought to silence his domestic critics by unexpectedly calling for a referendum to vote on the nation's proposed bailout.

Polls indicate that a majority of Greeks oppose the new austerity measures needed to receive the lifeline agreed upon last week to keep the increasingly troubled European Union member country afloat. Yet a majority also oppose leaving the euro zone.

It's a gamble that could risk the country's default if voters reject the EU-sponsored bailout. It might also refuel concern about other fiscally-challenged euro zone nations such as Portugal and Spain.

Surprised by Papandreou's move, French and German leaders urged him to uphold the terms of the deal. "The plan, designed to aid Greece and stem the wider debt crisis, is "more necessary than ever today," they said in a joint statement, adding that they "are convinced that this agreement allows Greece to return to lasting growth."

French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet on Wednesday to push for a quick implementation of Greece's new bailout deal ahead of a summit of the G20 major world economies, according to Reuters.

Investors and analysts were far from impressed either.

"This was completely unanticipated ... It is not needed and it is just sort of an internal political thing," John Canally, investment strategist and economist for LPL Financial in Boston, told Reuters. "This vote in Greece is going to hang over the market for next week or so, unfortunately."

In Europe, the Stoxx 600 Index ended the day with a 3.5 per cent plunge.

In afternoon trading in New York, the Dow Jones Industrial Average dropped 1.79 per cent, the Standard & Poor's 500 Index shed 2.00 per cent and the Nasdaq Composite Index lost 2.37 per cent.

A Dow Jones Newswires report citing a Greek Socialist Party official saying the referendum is "basically dead" helped Wall Street pare some losses. The damage to investors' confidence was already done.

The Chicago Board Options Exchange Volatility Index, or so-called investors' fear gauge, jumped 17.5 per cent.

Meanwhile, the Institute of International Finance, the lobby group for more than 450 financial firms which last week reached an accord with the EU for private bondholders to accept a 50 per cent cut in the face value of their Greek government debt, pledged support today.

"We will work closely with the Greek authorities, euro-area officials and other relevant parties to agree on, finalise and move toward implementation of the details of the voluntary private-sector involvement," the IIF said in a statement today, according to Bloomberg.

The greenback strengthened 0.85 per cent against a basket of its major counterparts.

Economic data showed the pace of growth in the US manufacturing sector eased in October. Even so, improvement in new orders suggested resiliency in the sector.