Stocks get brief U.S. relief, but Greece fears remain

LONDON -- A better than expected U.S. manufacturing survey helped shore up market sentiment briefly on Monday, but worries over a potential deterioration in Greece's debt crisis kept stocks down around the world.

Despite the upbeat U.S. report from the Institute for Supply Management, stocks in Europe still ended sharply lower and Wall Street dropped on worries about Greece. The euro slumped to a near-2011 low against the dollar.

The ISM survey, which often has a big impact in markets, found that factory output in the U.S. grew in September.

Its main index rose to 51.6 from 50.6 in August. Some economists had been predicting that it would fall below the 50 mark, which would indicate contraction.

"Some cheer may have been seen off the back of slightly better-than-expected economic data from the U.S., but this is now being seen as little more than a brief flicker of hope in what remains an otherwise distressed market," said Ben Critchley, a sales trader at IG Index.

A raft of U.S. economic data this week will culminates with Friday's nonfarm payrolls report for September. The figures often set the tone in markets for a week or two, and another weak number could reinforce concerns over the world's largest economy.

Monday's positive data surprise didn't last long, however.

In Europe, the FTSE 100 index of leading British shares closed down 1 percent at 5,075.50 while Germany's DAX fell 2.3 percent to 5,376.70. The CAC-40 in France ended 1.9 percent lower at 2,926.83.

The euro was down 1.1 percent on the day at $1.3240, its lowest level since the middle of January.

On Wall Street, the Dow Jones industrial average was down 0.6 percent at 10,846 while the broader Standard & Poor's 500 index fell by 0.8 percent to 1,122.08.

Earlier, markets had been rocked by fears that Greece will not get crucial bailout loans it needs to avoid a default. On Sunday, the Greek finance ministry said the deficit this year will likely be 8.5 percent of its gross domestic product, higher than the 7.8 percent previously anticipated.

Further bad news emerged Monday as the government submitted its 2012 budget to Parliament. Blaming a deeper-than-expected recession, it said the deficit next year will be higher than originally thought and that its debt load will hit a staggering 172.7 percent of national income.

The fact that Greece is finding it increasingly difficult to reduce its borrowings in spite of all its austerity measures has raised fears that international creditors could reconsider its bailout accords. That could have massive repercussions throughout Europe, especially if the banks stop lending to one another for fear of each other's exposure to Greek debt.

French-Belgian bank Dexia has been at the forefront of investor concerns Monday after Moody's warned it may downgrade its rating. At one stage, the bank's share price was trading around 14 percent lower but mounting speculation that the authorities in Belgium and France were preparing to shore up its balance sheet helped contain the losses and the stock ended around 9 percent lower.

Without the (euro) 8 billion ($10.8 billion) loan due from the bailout, Greece won't be able to pay all its bills starting in mid-October. Greece has been reliant since May 2010 on regular loans from a (euro) 110 billion ($150 billion) bailout from other eurozone countries and the International Monetary Fund. It was granted a second (euro) 109 billion package in July, but the details of that deal are still being worked out.

Under the first bailout, Greece has to achieve certain targets in order to get the cash it needs to pay off its bondholders and pay salaries and benefits. Representatives of the so-called troika -- the European Commission, European Central Bank and IMF -- are in Athens now, trying to assess whether Greece has done enough to get its hands on the next batch of bailout cash.

Finance ministers from the 17 euro countries, including Greece's Evangelos Venizelos, are meeting Monday in Luxembourg to assess the latest Greek developments.

Looking ahead, central banks in Europe will be eyed closely. Both the European Central Bank and the Bank of England are under pressure to do more to boost growth. A particularly grim eurozone manufacturing survey has added to expectations that the ECB will cut its main interest rate from the current 1.5 percent some time over the next couple of months.

The losses in Europe followed big losses in Asia, with Hong Kong's Hang Seng leading the way lower with a 4.4 percent decline to 16,822.15. Japan's Nikkei fell 1.8 percent to 8,545.48 even after a government survey showing an improvement in business confidence among Japanese manufacturers. Meanwhile China's main index in Shanghai declined 0.3 percent to 2,359.22.

Oil prices were volatile and recovered early losses as the tone steadied on Wall Street -- benchmark oil for November delivery was up 26 cents at $79.46 per barrel in electronic trading on the New York Mercantile Exchange.