* World stocks retreat; bank shares under pressure
* Euro slumps on euro zone wrangling over Greek rescue
* U.S., German government bonds rally after sell-off
* U.S. oil turns up on unexpectedly big inventory drop (Recasts, updates market activity)
By Richard Leong
NEW YORK, June 15 (Reuters) - Stocks and the euro fell into a tailspin on Wednesday as upheaval in Greece and indecision among Europe's leaders fed fears the nation is edging closer to default.
Investors fretted after euro zone finance ministers failed to agree on how to involve private investors in a second financial rescue for highly indebted Greece, which boosted safe-haven government debt of the United States and Germany.
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.
In the United States, dismal manufacturing and housing data intensified fears of slowing U.S. growth. For more details, see [ID:nN15281293]
"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."
The latest developments flipped investor sentiment that had fueled a rally in stocks and risky assets less than 24 hours earlier. Wednesday's flight out of growth-driven investments pushed the euro and U.S. stock indexes 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, Credit Agricole and Societe Generale on review for a possible downgrade, citing the French banks' holdings of Greek public and private debt. For more, see [ID:nL3E7HF0A4]
The rating agency later placed the ratings of some units of Portuguese banks in Brazil on review for possible downgrade. For more, see [ID:nWNA1064]
The MSCI world stock index <.MIWD00000PUS> sagged 1.7 percent after posting its biggest single-day percentage rise in two weeks on Tuesday due to less-grim Chinese and U.S. economic data.
On Wall Street, stocks wiped out Tuesday's gains, which had temporarily slowed a six-week sell-off.
The Dow Jones industrial average <.DJI> was down 177.90 points, or 1.47 percent, at 11,898.21. The Standard & Poor's 500 Index <.SPX> was down 21.48 points, or 1.67 percent, at 1,266.39. The Nasdaq Composite Index <.IXIC> was down 41.50 points, or 1.55 percent, at 2,637.22.
Top European shares <.FTEU3> slid 1.1 percent, 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 predict 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-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 percent to 20 percent from its peak in early May.
Meanwhile, striking Greeks 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 for their indebted country. This shifted the onus onto the leaders of Germany and France to forge a deal later this week.
The turmoil in Greece, which is seeking 120 billion euros in fresh aid, intensified on Wednesday. The leader of Greece's conservative opposition has asked Prime Minister George Papandreou to stand down and agree to a commonly accepted new head of government, a source from the New Democracy party told Reuters. For more, [see:ID:nATH006157]
"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.
Europe's single-currency
Investor jitters rekindled a flight into low-risk U.S. and German government bonds.
A stampede into bonds knocked benchmark 10-year Treasury
yields
Increased risk aversion wiped out earlier gains in oil and
gold. U.S. oil prices
Spot gold prices