European shares hit a near four-month low and yields on lower-rated euro zone sovereign debt climbed to their highest point since November, as financial markets braced for the possibility of Greece defaulting on its debt.
Markets were also cautious ahead of the start of a two-day meeting of the Federal Reserve later on Tuesday, the latest step towards the U.S. central bank's first rise in interest rates in almost a decade.
But the focus remained squarely on Greece's fate in the euro zone after both Athens and its creditors hardened their stances following the latest breakdown in talks.
Greek Finance Minister Yanis Varoufakis told a German newspaper that he is not planning to present new reform proposals at a Eurogroup meeting on Thursday, despite warnings from the rest of Europe that time is running out.
Asked if he would present new plans, Varoufakis said: "No, because the Eurogroup (of euro zone finance ministers) is not the right place to present proposals which haven't been discussed and negotiated on a lower level before."
Germany's DAX .GDAXI, France's CAC .FCHI and stock markets in Italy .FTMIB and Spain .IBEX fell 0.7 - 1.5 percent as they extended their losses over the last few weeks to between 6 and 8 percent. Britain's FTSE .FTSE was down 0.5 percent.
The lure of the safety of German government debt also remained strong as Bund yields dropped, periphery euro zone yields pushed higher and the euro remained highly volatile in the currency market.
It was tossed back up to $1.13 as 1-month euro volatility, which hit a 3-1/2 year high on Monday, showed little sign of abating and as Europe's top court said the bond buying plan European Central Bank chief Mario Draghi brought in 2012 when he promised to do "whatever it takes" to save the euro was in line with EU law.
Traders were trying to position too for the Federal Reserve meeting, which will conclude on Wednesday with a quarterly news conference and provide updated forecasts.
Having spent much of the Asian session on the front foot, the dollar index .DXY which measures it against the world's other top currencies, was virtually flat again in Europe.
"There is going to be some informational content in the dot charts, but it is going to be what chair Janet Yellen says at the press conference that will matter the most," said Eric Stein at U.S.-focused investment manger Eaton Vance.
"The pace they go at (with hikes) and the terminal rate that they end are more important than the month they first hike, but the market is -- wrongly in my opinion -- viewing the timing of the first rate as a signal."
FEELING THE PINCH
Global equity markets were feeling the pinch of combined Greek and Fed uncertainty.
"The macro duo of the FOMC and Greece continue to create jitters -- it will be a daily theme for the next month ... in the case of the Fed, the next three to four months," Evan Lucas, market strategist at IG in Melbourne, wrote.
China's high-flying stocks .SSEC lost some altitude with a 3 percent tumble, South Korea's Kospi .KS11 fell 0.7 percent and Japan's Nikkei .N225 dropped 0.6 percent, as the external factors overcame signs its economy is gaining traction.
Australian shares bucked the trend and ended flat as hopes for more easing by the Reserve Bank of Australia following its latest meeting minutes provided support.
The dollar had also received a small lift after Bank of Japan Governor Haruhiko Kuroda said his remarks on the yen last week were not an assessment of nominal forex levels. Kuroda had caused a sharp drop in the dollar last week when he told parliament the yen was already "very weak".
In the main commodity markets U.S. crude oil rose as a tropical storm hit the coast of oil-producing Texas. U.S. crude CLc1 was up 1 percent at 60.14 a barrel, paring the previous day's losses suffered on Greek debt angst. Brent climbed 0.5 percent to $65.25 a barrel LCOc1.
Global economy-sensitive metal copper CMCU3 was stuck near a three-month low at $5,787.50 a tonne, while traditional safe-haven gold retained most of its recent gains as it hovered at $1,183 an ounce.
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