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European shares sank almost 4% and government bond yields in Italy, Spain and Portugal jumped on Monday as investors priced in a growing risk that Greece will be the first country to leave the euro.
Drops in bank shares and a 30 basis point rise in the cost of borrowing for other southern European euro zone members was the start of an acid test of policymakers' hopes that, if Greece does go, the rest of Europe is isolated from the fallout.
Greece's banks and stock market were closed on Monday and were expected to remain so until after the July 5 snap referendum called by Greek Prime Minister Alexis Tsipras on further austerity demanded by euro zone partners.
That prompted the worst falls in European shares since 2011, but the euro itself proved relatively robust, recovering much of a roughly 2-percent initial fall to trade down 0.8% at $1.1075.
It rose against the Swiss franc after Switzerland's National Bank confirmed it was intervening to counter gains for the franc that it already sees as massively overvalued.
"The Greek debt crisis really is a 'crisis' now," said Kit Juckes, a markets strategist with French bank Societe Generale in London.
"(But) global markets and the world's policy-makers are much more prepared for a possible Greek default and/or exit from the euro zone than they were a couple of years back."
Adding to the gloomy backdrop, China shares dived another 3%, bringing the losses in the past two weeks to 25%, with the Chinese central bank's measures on Saturday to support the economy unable to calm jittery investors.
That left little appetite for riskier assets ahead of Sunday's Greek referendum.
"The market has increased the possibility in its mind that these events trigger some sort of exit," said Michael Michaelides, an interest rates strategist at RBS.
"Investors are viewing next Sunday's vote as a de facto referendum on membership of the euro area."
Germany's Dax fell by 3.8%, France's CAC 40 3.9% and Britain's FTSE 2%. Italian and Spanish markets both fell by more than 4%.
In currency markets, investors sought out the traditional security of the Japanese yen, which gained 1.5% against the euro and 0.8% against the dollar.
Britain is regarded as another safer haven and the euro also hit a 7-1/2-year low against sterling of 69.885 pence, but all of those moves were more muted in morning trade in Europe than they had been overnight in Asia.
"Right now the surprise is that the euro is not weaker. The logic may either be that the Greek government will come back to the negotiating table or that it will not survive long if 'Yes' prevails contrary to their recommendation," said Steven Englander, Global Head of G10 FX Strategy at CitiFX in New York.
Gold prices gained 0.8% to $1,184.20 per ounce on safe-haven buying, while Brent crude oil futures fell 1.4% to $62.38 per barrel, hitting a three-week low.
