World stocks and the euro fell sharply on Monday as investors feared a messy Greek default within weeks unless Athens implements the austerity measures demanded by its international lenders.

International lenders told Greece on Monday that it must shrink its public sector and improve tax collection to secure a vital 8 billion euro rescue payment next month.

After a rare four-day rally in world stocks last week, markets fear the crisis is worsening again after Greece's prime minister cancelled a U.S. trip to chair an emergency cabinet meeting at home and German Chancellor Angela Merkel suffered a regional election loss.

EU finance ministers also failed to make progress on the debt crisis at the weekend, and the focus is now shifting to a conference call between Greece and its international lenders at 1600 GMT to see how Greece plans to make up its budget shortfall and avoid a disorderly default.

With the gloom so widespread, investors took little comfort from expectations that the Federal Reserve would introduce new measures to stimulate the U.S. economy later this week.

'It's no more a link between markets and economics, but a link between markets and politics. The politicians should have seen the crisis coming and done more, but the problem is they are not proactive,' said Koen De Leus, strategist at KBC Securities, in Brussels.

'We are just going from one crisis to another. It's a nightmare for the markets.'

The MSCI world equity index fell 1.1 per cent on the day, after posting its biggest weekly gain since early July last week in buying largely driven by short-term players.

Long-term asset managers have been either staying on the sidelines, or steadily cutting back on exposure to risky assets.

The MSCI index is around 5 per cent above its one-year low hit earlier in September.

European stocks lost nearly 2 per cent, led by sharp losses on the banking sector , while emerging stocks  dropped nearly 2.2 per cent.

US stock futures pointed to a weaker open on Wall Street later. The euro fell more than one per cent to $1.3632.

Policy risks

Events this week promise a heavy dose of policy action. Finance ministers of the BRIC emerging economies - Brazil, Russia, India and China - meet later this week to discuss steps to offer support to the euro zone.

Market sentiment may change if they buy euro-denominated bonds, as suggested in preliminary talks, after the European Central Bank's 70 billion euro bond-buying spree over the last five weeks or so failed to stop the crisis from spreading to Spain and Italy.

Investors will also be watching US President Barack Obama's deficit-reduction plan on Monday aimed at covering the cost of his recent jobs bill.

US crude oil was down 1.4 per cent to $86.76 a barrel. Bund futures rose 78 ticks.

The dollar gained 0.7 per cent against a basket of major currencies, supported by expectations that new Fed measures would be focused on the maturities of the debt it buys rather than on expanding its already swollen balance sheet.

'We are constructive on the dollar in the medium term and it seems increasingly likely that the Fed will resort to extension of maturities rather than its balance sheet,' said Chris Walker, currency strategist at UBS.-Reuters