World shares tumbled nearly 2 percent on Monday with European equities at 26-month lows, down more than 20 percent this year, as investors worried Greece would default amid signs of rifts among euro zone policymakers.

Japan's Nikkei closed at a 2-1/2 year low.

Yields on long-term core euro zone debt, home to safety plays during times of strife, fell sharply and the euro slumped against the dollar and yen.

The cost of insuring peripheral euro zone debt against default rose, to record levels for Greece and Portugal.

Markets were partly reacting to the failure over the weekend of the Group of Seven industrialized nations' finance ministers to come up with more than a stated commitment to help turn the world economy around.

But they were mainly focused on the euro zone debt crisis.

Europe is not just lurching from one crisis to another. It is lurching into a new one before the previous one is solved, said Makoto Noji, senior strategist at SMBC Nikko Securities.

The pan-European FTSEurofirst was down 2.6 percent.

German policymaker Juergen Stark's resignation from the European Central Bank's board on Friday underscored internal divisions over its bond-buying program -- one of the bank's main weapons in fighting the debt crisis, by forcing down yields on debt of countries under pressure from the bond markets.

At the same time, worries bubbled up again over Greece's ability to meet commitments to qualify for more bailout money.

Fears about a Greek default rose last week after senior politicians in German Chancellor Angela Merkel's center-right coalition started talking openly about it. Greece, meanwhile, confirmed on Monday that the country has cash for only a few more weeks.

International lenders threatened last week to withhold the sixth bailout payment of about 8 billion euros ($11 billion) because of the country's repeated fiscal slippage.

The Greek government announced on Sunday a new property tax to make sure it would meet its budget targets and qualify for the tranche.

The Greek situation is dominant, chances of some sort of default have increased -- the Germans seem to be hinting at that, one bond trader in Europe said.

EURO SINKS

The euro dived to a seven-month low against the U.S. dollar and a 10-year trough versus the yen.

The outlook for Greece is almost completely unknown. Support for the country appears to be shaking. The market is starting to think the worst could happen, said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking.

It's as if policymakers are starting to prepare for that, Kitakura said.

The euro fell as low as $1.34949, its lowest since February.

On bond markets, Italian and Spanish government bond yields rose, feeling the pressure of upcoming debt supply and the rising concern over Greece.

(This story was corrected to change dollar conversion to billion in 12th paragraph)

(Editing by Catherine Evans)

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