Europe stocks skidded and the euro fell to a 21-month low on worries about Greece's possible exit from the eurozone, which threatened to deepen the region's debt crisis and hurt an already fragile global recovery.

Nervous investors piled into low-risk US and German government debt, sending their yields lower. The US dollar also was favored as a safe haven by investors.

Each eurozone country will have to prepare a contingency plan for the possibility of Greece's leaving the bloc, three eurozone sources said, citing an agreement reached by officials.

A scramble for low-risk investments enabled Germany to pay no interest on 5 billion euros in new two-year debt amid the absence of new measures to tackle the region's debt crisis from a European leaders' summit in Brussels.

"The markets are on edge and sensitive to every possible out-of-control scenario coming out of Europe," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Europe's leaders were expected to discuss boosting growth at a dinner meeting on Wednesday, as well as the idea of a joint euro-zone bond. French President Francois Hollande supports the bond plan, but German Chancellor Angela Merkel opposes it.

"Most are expecting no concrete solution out of the meeting, just a few ideas discussed on how to boost growth with no real commitment to carry them out, while Angela Merkel is almost certain to reject any proposal by Francois Hollande in relation to euro bonds," said Craig Erlam, market analyst at Alpari.

Perception of a stalemate between the leader of the eurozone's most powerful member and heads of other bloc countries unleashed selling of their common currency and shares worldwide.

The MSCI world equity index was 1.9 per cent lower at 297.72 after touching its lowest level in about five months. It is on track for its biggest one-day drop since early March.

After falls of more than 1 per cent on Wall St, stocks pared losses sharply into the close, with both the Nasdaq and the S&P 500 turning positive in a late-day reversal. The turnaround was led by shares of materials companies in the S&P500, while Apple boosted technology shares.

The Dow Jones industrial average was down 11.65 points, or 0.09 per cent, at 12,491.16. But the S&P 500 Index was up 2.05 points, or 0.16 per cent, to 1318.68. The Nasdaq Composite Index added 15.46 points, or 0.54 per cent, to 2854.54.

Dell slides

The tech sector was a drag on US shares, led by personal computer maker Dell, which reported disappointing second-quarter earnings late on Tuesday. Dell dropped 18.1 per cent to $US12.36.

Social networking company Facebook Inc remains a market focus since its stock started trading on Friday. The stock has been hammered as regulators said they would conduct inquiries into its initial public offering.

Facebook stock snapped a two-day losing streak. It rose 2.8 per cent to $US31.93, which is still below its $US38 IPO price.

The FTSE Eurofirst index of top European shares finished 2.18 per cent lower at 971.99 after touching a fresh year low at 970.98.

In Tokyo, the Nikkei index closed down 2 per cent at 8,556.60.

The euro fell 1 per cent to 1.25550 on the EBS trading platform after touching $US1.25453, its lowest level since July 2010.

"The euro is mostly selling off because of the dysfunctional process. We don't know what's going to happen and we don't know what the European leaders want - there is no leadership," said Axel Merk, portfolio manager of the $US650 million Merk Hard Currency Fund in Palo Alto, California.

Contagion fears from the fiscal woes in Europe, with encouraging data on new US home sales, strengthened the dollar against most major currencies. The dollar index rose 0.76 per cent to 82.114 after touching 82.221, its highest since September 2010.

eurozone finance officials prepared contingency plans for a possible Greek euro exit on Monday afternoon, according to eurozone sources, during an hour-long teleconference of the Eurogroup Working Group. A document seen by Reuters detailed the potential costs to individual member states of a Greek exit and said that if it came about, an "amiable divorce" should be sought.

"It's very frightening to hear about this kind of talk, even if it makes sense as a contingency, because the lack of a clear path there continues to be very problematic for banks," said James Dunigan, chief investment officer of PNC Wealth Management in Philadelphia.

The strong German Schatz auction lifted June Bund futures to a fresh contract high at 144.28, up more than 1 point on the day. Benchmark US Treasury yields slipped to 1.72 per cent, within striking distance of the lowest level in at least 60 years.

The United States, like Germany, enjoyed a further drop in borrowing costs when it sold $US35 billion of new five-year notes at a yield of 0.748 per cent, the lowest ever at an auction of this maturity.

Signs of a potential deal between Iran and the U.N.'s International Atomic Energy Agency to unblock investigations of suspected work on nuclear weapons in the oil-producing country sent Brent crude below $US107 a barrel.

July Brent traded down $US2.99 at $US105.42, flirting with its lowest level in five months. US oil futures declined $US1.99 to $US89.86 a barrel, which is its lowest level since Nov. 1.

Spot gold fell for a third straight session but halved its earlier loss. Bullion prices were last down 1 per cent at $US1,550.70 an ounce, $US23 above the lowest level so far this year, set a week ago.