European stock markets drop as Greek default nears

Europe's main stock markets fell on Tuesday as Greece confirmed it would not make a debt payment due to the International Monetary Fund by day's end, placing it on course to default.

In afternoon deals Tuesday, Frankfurt's DAX 30 dropped 0.39 percent to 11,040.44 points and in Paris the CAC 40 slipped 0.32 percent to 4,854.44 compared with Monday's close.

London's benchmark FTSE 100 index lost 0.56 percent to 6,594.40 points, with investors reacting to news that although Britain's economy grew faster-than-expected in the first quarter, it was down compared with growth at the end of 2014.

Losses across stock markets were less acute compared with Monday, when the Frankfurt and Paris indices both closed down more than 3.5 percent over fears that Greece could be heading for a eurozone exit. That prospect that loomed even larger Tuesday after Greece's Finance Minister Yanis Varoufakis said Athens will not pay the IMF about 1.5 billion euros ($1.7 billion) due.

Despite that development, however, hopes lingered that a wider agreement between Athens and its creditors may be turned in coming days to avert the largest fear of Greece crashing out of the eurozone.

"Dealers are protecting themselves against a possible default, but deep down there is a sense that some sort of compromise will be reached," said David Madden, market analyst at IG trading group.

Defiant Athens has urged Greeks to reject creditors' demands for tough reforms in a weekend referendum, despite warnings that this would lead to a chaotic Greek exit from the eurozone.

Thousands took to Greece's streets on Monday night to support their government's opposition to the latest debt proposals, after a clash with the country's creditors forced a shutdown of its banks and brought the country close to financial collapse.

In foreign exchange, meantime, the euro dropped to $1.1172 from $1.1247 late in New York on Monday.

Lee Hardman, a London-based currency analyst at Bank of Tokyo-Mitsubishi, pointed out that "the negative developments regarding Greece are increasing downside risks for the euro."

"At this stage although the risk of 'Grexit' have increased, the market is still comfortable that the more likely scenario remains that Greece will remain within the eurozone which is limiting euro weakness in the near-term."

A one point on Monday, the single currency tumbled below $1.1 before pulling back late in the day.

Prime Minister Alexis Tsipras, who was elected on an anti-austerity ticket in January, has urged Greeks to reject creditors' tough reform demands in Sunday's referendum, but has also pleaded for an bailout extension to keep Athens afloat.

Failure to pay could see Greece become the first country to default on the International Monetary Fund since Zimbabwe in 2001, and in terms of standards of living, it would be the wealthiest.

Elsewhere, Asian stock markets rebounded after the previous day's rout, while Shanghai surged at the end of a volatile day.