World stocks hit 8-week low on euro zone worries

World stocks fell to eight-week lows and the euro hit a one-year trough on Wednesday as investors fretted that a debt crisis would spread to other euro zone countries, following a massive bail-out for Greece.

The European Union and International Monetary Fund agreed a €110 billion aid package for Greece at the weekend, but the promise has failed to calm markets.

Shares in Spain and Portugal, two of the weaker euro zone members, fell 2%, and the FTSEurofirst 300 index of leading European shares dropped 0.75% to two-month lows.

The euro, which suffered its steepest one-day loss since last June on Tuesday, notched up another one-year low at $1.2936.

In Athens, striking public sector workers challenged Greece's bailout-for-austerity deal, while policymakers, including IMF chief Dominique Strauss-Kahn and the European Central Bank's Axel Weber, warned of the dangers of contagion to other high-debt euro zone nations.

"The questionable way the Greek crisis has been handled and concerns about the peripherals are weighing on sentiment. I expect euro weakness to remain in place," said Kenneth Broux, market economist at Lloyds Banking Group.

"I see $1.25 as the next big (euro) level on the downside," he said.

World stocks as measured by MSCI fell half a percent to their lowest since early March, while the more volatile emerging equities index fell 1.5%.

Asian markets also weakened. Shanghai's key index fell as much as 2% to its lowest in seven months, suffering from Beijing's weekend moves to tighten policy.

Investors found harbour in the dollar. The dollar index was steady after gaining 1.4% on Tuesday, its biggest daily gain this year, and the US currency tested eight-month highs against the yen near 95.

Oil extended losses towards $82, following the steepest one-day percentage loss in three months on Tuesday, on rising inventories and a firm dollar.

Gold also came under pressure as the dollar strengthened.

The 10-year Bund future rose to its highest level since March 2009, also on safety flows.

Portuguese debt insurance costs rose to 360.7 basis points in the five-year credit default swap market, one of the highest levels in Europe, according to CDS monitor CMA DataVision. Spanish 5-year CDS edged up to 211.8 bps.

"The contagion in Europe is a worry. After getting a bigger bail-out and agreement on austerity measures with the Greek government, the market is still heading for the exit on euro zone periphery debt," said analysts at RBS in a client note.

"The question has to be asked whether the European authorities can stop this from snowballing."