* S&P downgrades Portugal to A-minus with outlook negative
* S&P cuts Greece to "junk" territory
* Euro deepens losses against dollar; Treasuries rally
* European equities in biggest sell-off in two months
* U.S. major indexes fall about 1.5 percent (Updates with close of European markets)
By Jennifer Ablan
NEW YORK, April 27 (Reuters) - Stocks plunged worldwide and the euro fell 1 percent against the dollar on Tuesday after Standard & Poor's cut its credit rating on Greece into "junk" territory and slashed its ratings on Portugal.
German Bund futures hit a session high after S&P cut its ratings on Portugal by two notches. The move by S&P sparked an investor flight to safe havens, driving up U.S. Treasury debt prices and the price of gold.
European equities suffered their biggest losses in two months, with the pan-European FTSEurofirst 300 index <.FTEU3> closing down 3.07 percent and Portugal's benchmark index plunging 5.36 percent. The Greek bank index <.FTATBNK> plunged 9.23 percent, and European bank stocks skidded.
On Wall Street, the news on Greece and Portugal overshadowed strong earnings, dragging down all three major indexes. The market suffered a body blow following the news on Greece's ratings, with indexes off roughly 1.50 percent.
"The contagion story is really going to take its toll," said Win Thin, a currency strategist at Brown Brothers Harriman in New York.
"There's just a feeling that even with all these downgrades, we're still playing catch-up and there's still more to bad news to come," he said. "People know Greece and Portugal are issues, but the gorilla in the room is still Spain."
Standard & Poor's downgraded Greece into junk territory on concerns about its ability to implement the reforms needed to address its high debt burden, cutting its rating a full three notches to BB-plus, the first level of speculative, or "junk," status.
The outlook is negative, meaning the agency could downgrade the rating again.
In its downgrade of Portugal, Standard & Poor's cited concerns about Portugal's ability to deal with high debt levels given the country's weak economic outlook. It cut the rating by two notches to A-minus, or four notches above speculative, or junk.For details see [ID:nWNA9638] and [ID:nWNA9645].
Investors had already bracing for the next weak link in the euro zone, as Germany continued to hold out for strict conditions on the aid package offered to Greece by the European Union and the International Monetary Fund.
German Chancellor Angela Merkel has said that Greece must commit to further painful austerity measures and show that it can return to a sustainable economic path before Germany can approve aid. [ID:nBEB004453]
"If (Germany) were moving faster, it's arguable the risk of contagion would be less. However, at this point in time, the markets smell blood," said Charles Diebel, head of European interest rates strategy at Nomura.
In midday trading in New York, the euro was 1 percent lower
at $1.3258
Five-year credit default swaps on Greek government debt rose to a record high of 821 basis points from 710.3 basis points at New York close on Monday. The cost of insuring Portuguese debt for five years rose to a record 370.3 basis points from 311.2 basis points.
Greece is hoping that the 45 billion euro ($59.97 billion) aid package from the EU and the IMF will arrive in time to finance a debt roll-over on May 19, but Merkel's comments have created market jitters as the timing for approving the package now looks tight.[ID:nLDE63P0LU]
Fears of a Greek default and contagion within the euro zone
prompted a sell-off in Greek and Portuguese bonds. The
Greek/German 10-year bond yield spread
Banks took a pounding despite forecast-beating quarterly
earnings from Deutsche Bank
U.S. EQUITIES POUNDED
In stocks, benchmark indexes were down. The Dow Jones industrial average <.DJI> was down 156.89 points, or 1.40 percent, at 11,048.14. The Standard & Poor's 500 Index <.SPX> was down 22.11 points, or 1.82 percent, at 1,189.94. The Nasdaq Composite Index <.IXIC> was down 41.81 points, or 1.66 percent, at 2,481.14.
In addition to the sovereign ratings downgrades in Europe,
financial stocks were in focus as executives of Goldman Sachs
Group Inc
"The markets are really selling off on the combination of the widening sovereign debt crisis and the hammering that is going on in the Senate hearing," said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.
"Just like in 2008, when you had one big company fall after another, you're now seeing this spread from Greece to Portugal," Lancz said.
In appearances before the Senate Permanent Subcommittee on Investigations kept financial stocks in focus, Goldman executives strove to fend off accusations they helped inflate the housing bubble and then made billions off its collapse.
U.S. Treasury government bonds rose as investors fled to safe havens.
The benchmark 10-year U.S. Treasury note
"The situation in Europe just seems to be getting more problematic by the day," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York. "It has created more of a flight-to-quality bid in Treasuries."
In currencies, the dollar was up against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> up 0.70 percent at 82.051 from a previous session close of 81.481.
In energy and commodities prices, U.S. light sweet crude oil
Spot gold