* Wall Street slides 1.7 pct, led by bank shares
* Euro sags to 2-1/2-week low on wrangling over Greek aid
* U.S. oil falls 4 pct to lowest level since February
* U.S. Treasuries poised for biggest rally in 9 months (Updates with late market action)
By Richard Leong
NEW YORK, June 15 (Reuters) - World stocks and the euro slumped on Wednesday as upheaval in highly indebted Greece and indecision among Europe's leaders about helping the nation fed fears the euro zone member is edging closer to default.
The euro tumbled 2 percent against the dollar and government debt of the United States and Germany rallied on a safety bid after euro zone finance ministers failed to agree on how to involve private investors in a second financial rescue for Greece.
Senior EU officials said a deal was now unlikely to be reached at a summit next week and was likely to be delayed until mid-July.
"It had looked like we were making progress on addressing Greece's problems but now it seems things are fraying at the edges. People are capitulating, taking a defensive posture and getting out of their risky trades." said George Davis, senior currency strategist at RBC Capital Markets in Toronto.
The dollar's strengthening against the euro helped propel a more than 4 percent slide in the price of U.S. crude oil, hurt also by further signs of economic weakness.
In the United States, dismal manufacturing and housing data intensified fears of slowing growth.
"There are plenty of things you can pick to be worried about," said John Wilson, chief equity strategist at Morgan Keegan at Chattanooga, Tennessee. "You are seeing a capitulation and market sentiment is getting more negative."
Investors recoiled at the latest developments less than 24 hours after they had tip-toed back into stocks and other risky assets. Wednesday's flight out of growth-driven investments pushed the euro and U.S. stock indexes down near key technical support levels.
Bank shares led the global sell-off after Moody's Investors
Service said it may put the credit ratings of French banks BNP
Paribas
The rating agency later placed the ratings of some units of Portuguese banks in Brazil on review for possible downgrade.
The MSCI world stock index <.MIWD00000PUS> sagged 1.9 percent a day after posting its biggest single-day percentage rise in two weeks due to less-grim economic data from China and the United States.
On Wall Street, stocks erased Tuesday's gains, which had temporarily slowed a six-week sell-off.
The Dow Jones industrial average <.DJI> closed down 178.84 points, or 1.48 percent, at 11,897.27. The Standard & Poor's 500 Index <.SPX> ended down 22.45 points, or 1.74 percent, at 1,265.42. The Nasdaq Composite Index <.IXIC> finished down 47.26 points, or 1.76 percent, at 2,631.46.
Top European shares <.FTEU3> lost 1.1 percent on the day, while Tokyo's Nikkei <.N225> ended 0.3 percent lower following Tuesday's rally in New York.
STOCKS VULNERABLE
As more evidence of an economic slowdown is likely to emerge, some analysts see a further decline in stocks.
"Even if it's in a soft patch, the slope of the U.S. recovery will still be disappointing and it will be an uneven performance," said Clark Yingst, chief market analyst at Joseph Gunnar in New York.
The expiration of the Federal Reserve's $600 billion bond program, known as QE2, at month's-end and disappointing quarterly company results could put additional selling pressure on stocks in the near term, Yingst said.
He forecasts the S&P 500 could fall 11-20 percent from its peak in early May.
Meanwhile, tens of thousands of protesters in Greece raged against a new wave of austerity after euro zone finance ministers failed to agree how to make private creditors contribute to a second bailout. Greece is seeking 120 billion euros in fresh aid.
The onus has now shifted to the leaders of Germany and France to forge a deal later this week.
Prime Minister George Papandreou offered to quit and make way for a national unity government. For more, see [ID:nLDE75E0JC]
"A resolution has to be met at some point in time," said John McCarthy, director of currency trading at ING Capital Markets in New York. "Greece can't continue along its current path, we all know that. The question is, 'What is the resolution?'"
The latest twists in Greece's predicament, combined with Moody's warning on French banks, knocked the euro lower.
The single-currency
Investor jitters rekindled a flight into low-risk U.S. and German government bonds.
The stampede into bonds knocked benchmark 10-year Treasury
yields
German Bund futures
Safety bids also lifted gold prices. Spot bullion was last at $1,530.50 an ounce, up from $1,523.25 on Tuesday.
Increased risk aversion wiped out earlier gains in oil.
U.S. oil prices