World equity markets and the euro turned south on Thursday after the European Union said Greece's budget deficit was worse than first believed, feeding fears about the country's ability to avoid default.

World stocks as measured by MSCI <.MIWD00000PUS> were down half a percent and the pan-European FTSEurofirst 300 <.FTEU3> dropped 0.9 percent.

Wall Street looked set to join in the losses.

Eurostat, the EU's statistics office, said Greece's budget deficit would be nearly a full point wider than first estimated, at 13.6 percent of gross domestic product last year.

This drove Greek bond yields higher, widening their spread over benchmark euro zone bonds. The cost of insuring Greek debt against default also rose.

(The Greek debt crisis) is the problem that never seem to go away, said David Jones, chief strategist at IG Index. It seems to fade into the background, but every couple of weeks it comes back to spook the market.

Greece has been struggling to persuade markets it can slash its budget deficit and avoid default. It needs to raise 10 billion euros next month with an 8.5 billion euro bond falling due on May 19.

Talks to hammer out details of a potential European and International Monetary Fund aid deal began on Wednesday but investors are still dumping Greek assets with resistance against the package heated both at home and abroad.

EURO SLIDES

The euro fell after the Eurostat data showing Greece's deficit was worse than previously thought highlighted concerns the Greek debt crisis could impact other euro zone countries.

The figures pushed the euro to a session low of $1.3356.

The data highlights the fiscal issues and contagion issues, said Adarsh Sinha, currency strategist at Barclays Capital.

The euro was later down 0.4 percent at $1.3335.

Against the pound, the euro hit a two-month trough of 86.61 pence after UK data suggested Britain's outlook has brightened, ahead of GDP numbers due on Friday.

On bond markets, the pressure was felt beyond Greece. Portuguese/German spreads widened to a euro lifetime high while Irish/German spreads also widened.

A Spanish auction earlier sold 21 billion euros worth of 15-year bonds, at the lower end of the expected range.

(Additional reporting by Simon Falush and Tamawa Desai, editing by Mike Peacock)

United kingdom