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Eurozone stocks, low-rated bonds and the euro weakened on Tuesday as Greece looked set to default on a repayment due to the International Monetary Fund and to plunge deeper into financial crisis.
There was little evidence of panic, however, with investors pointing to Europe's improved ability to fight financial contagion since the height of the euro debt crisis in 2011.
The breakdown of talks between Athens and international creditors over the weekend has led to a shuttering of banks and capital controls in Greece and market jitters worldwide, with a referendum due on Sunday which EU partners say will be a choice of whether to stay in the euro.
Despite a sense of heading into uncharted territory as the risk of a Greek exit from the euro zone rise, the sell-off was more muted than on Monday as investors pointed to possible intervention from the European Central Bank to fight prolonged financial turmoil as well as hopes that a deal might be found.
And while Greek ripples were also a drag on investor sentiment in Asia, Chinese stocks broke a punishing three-day losing streak as regulators and the government stepped up efforts to prevent the past few weeks' plunge from inflicting further damage on an already slowing economy.
Blue-chip euro-zone equities fell 1%, marking a 10% correction from 2015 highs hit in April, but they are still up about 10% since the start of 2015. Italian, Spanish and Portuguese sovereign bond yields rose and the euro fell as hedge funds stepped up sales.
"Even after these market swings, a Greek exit is still not fully discounted as a positive outcome is still possible," BNP Paribas Investment Partners said in a note to clients.
"With a majority of Greeks in favour of staying in the eurozone, there is a decent probability of a referendum outcome in favour of the creditors' proposals. But until the results are known, we are likely to see continued market volatility."
The MSCI All-Country World equity index was flat. MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.1% but remained near a five-month low hit on Monday. Japan's stock index rose 0.6% while Korea gained 0.7%.
In commodities, oil futures hovered below three-week lows and gold failed to garner strong safe-haven bids, even with ongoing Greek uncertainty. London nickel slid 8% to six-year lows and Shanghai nickel also tumbled after the Shanghai exchange broadened delivery options.
A risk gauge, the CBOE Volatility index, spiked overnight to its highest levels since February.
"There is still too much uncertainty in the markets and investors would be watching developments in Greece and China very carefully before jumping in," said Karine Hirn, Hong Kong-based partner of Swedish group East Capital, a $3.5 billion fund management firm.
