World stocks fell to a 15-month low and the euro tumbled to its weakest level against the yen in more than a decade on Monday as growing expectation of a Greek default increased fears of another global recession.

An admission by Athens that it will miss its deficit target of 7.6 percent this year reignited worries about a Greek default. The price of U.S. crude oil tumbled 2 percent, while a bid for safety stoked demand for U.S. Treasury debt.

Major U.S. stock indexes fell more than 2 percent, with financial shares hard hit on a new round of concerns over Greek debt, eclipsing an early boost from better-than-expected U.S. manufacturing data.

Bank shares were also battered in Europe as investors feared they may have to make further write-downs on Greek debt holdings. French-Belgian financial group Dexia shares slumped 10 percent as its capital position looked increasingly stretched by its exposure to Greece.

Athens, in a draft budget sent to parliament on Monday, forecast a deficit of 8.5 percent of gross domestic product for 2011.

This news isn't surprising, but if Greece continues to have problems, that could really drag Europe into recession, and possibly the U.S. as well, said Randall Warren, chief investment officer of Warren Financial Service in Exton, Pennsylvania.

European policymakers appeared no nearer to agreeing on a definitive solution to the crisis. Officials meeting on Monday were discussing ways to leverage the bloc's rescue fund and pressure Greece to implement agreed structural reforms.

Ultimately, Greece would need to see its debt written down by more and with that you need probably some kind of shoring up of the banking sector, said Alec Letchfield, chief investment officer at HSBC Asset Management.

U.S. stocks extended losses in the afternoon, with the S&P 500 falling to a 13-month low. The KBW bank index <.BKX> fell 4.78 percent, with Morgan Stanley shares down 7.6 percent and Bank of America down 9.6 percent. On Friday, stocks closed their worst quarter since 2008.

The Dow Jones industrial average <.DJI> closed down 258.08 points, or 2.36 percent, at 10,655.30, while the Standard & Poor's 500 Index <.SPX> fell 32.19 points, or 2.85 percent, to 1,099.23. The Nasdaq Composite Index <.IXIC> lost 79.57 points, or 3.29 percent, to 2,335.83.

The MSCI All-Country World index <.MIWD00000PUS> fell 2.9 percent to its lowest level since July 2010. The FTSEurofirst 300 <.FTEU3> of top European shares ended 1.2 percent lower.

The October-December period is, traditionally, the best quarter for equities. Reuters data shows that since 1971, world stocks have on average risen 3.7 percent in the fourth quarter.

Dexia closed 10.16 percent lower after credit agency Moody's announced a rating review for possible downgrade on concerns about liquidity. Dexia called an emergency board meeting on Monday, a source familiar with the matter told Reuters.

Belgian and French finance ministers were also meeting with other euro zone leaders on Monday evening. The Belgian finance minister, Didier Reynders, said the two states, as well as Dexia shareholders, would do all that was required to support their banks.

The euro hit an 8-1/2-month low of $1.3185. Against the safe-haven yen, it lost 1.76 percent to 101.11 yen, its lowest since May 2001 according to Reuters data.

Euro zone bank issues remain a big issue, and we expect the euro's downside to continue, said George Saravelos, G10 FX strategist at Deutsche Bank.

The benchmark 10-year U.S. Treasury note gained 49/32 in price, driving its yield down to 1.7492 percent. Treasuries prices were also supported by the Federal Reserve's first bond purchase for Operation Twist, its latest program aimed at helping the U.S. economy.

U.S. crude oil prices settled down $1.59 at $77.61 a barrel, the lowest closing price in more than a year.

Gold rose 1.6 percent, its biggest one-day gain in a month, as the safe-haven bid returned. Spot gold rose to $1,649.30 an ounce and U.S. gold futures for December delivery settled up $35.40 at $1,657.70 an ounce.

But markets were closed in No. 2 gold consumer China for a public holiday and trading volume was half its 30-day average, suggesting the metal's rally could easily run out of steam.

(Additional reporting by Ryan Vlastelica and Frank Tang in New York, Natsuko Waki in London; Editing by Dan Grebler)

Corrects lead to say 15-month low, not 2-year low.