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The S&P 500 has slid more than 5 percent so far this week in moves reminiscent of the stomach-churning market swings seen over the past two months and after investors thought the worst of the euro zone debt crisis was over.

The speedy pullback comes after stocks rebounded to post their best month in 20 years in October. The gains were fueled by hope for an eventual deal to rescue Greece, finally agreed upon at last week's European Union summit.

"The fact that we gave it back as quick as we did in two days is very concerning," said Ari Wald, an analyst at Brown Brothers Harriman.

"It looks very much as though it was a lot of short-covering, a lot of bears found themselves on the wrong side of the trade," he said of the October rally.

Analysts said if Greek voters reject the unpopular bailout in a vote proposed by Greek Premier George Papandreou, it would likely result in a "hard default" by Greece, causing bigger losses for banks and raising the threat of systemic risk.

The news slammed European stocks, particularly the region's banks, which slumped 6 percent. U.S. banks were also hit hard. Morgan Stanley, which investors worry has heavy exposure to Europe, fell 8 percent to $16.23.

Indexes swung sharply as successive European lawmakers lined up behind the bailout package but returned to close near session lows after a Greek government spokesman said the prime minister told his cabinet the referendum would go ahead.

The Dow Jones industrial average fell 297.05 points, or 2.48 percent, at 11,657.96. The Standard & Poor's 500 Index lost 35.02 points, or 2.79 percent, at 1,218.28. The Nasdaq Composite Index dropped 77.45 points, or 2.89 percent, at 2,606.96.

The selloff came on sharp spike in volume with 10.3 billion shares traded on the NYSE, the Amex, and the Nasdaq, 22 percent above its 20-day moving average, while the CBOE volatility index jumped 16 percent to 34.77, its highest since around mid-October.

Nearly six stocks fell on the NYSE for every one that rose.

Adding to the gloom, factory activity in Asia's big export economies slowed to the weakest rate in nearly three years in October, while UK manufacturing suffered a sharp decline, reigniting fears of a global slowdown.

The S&P 500 traded below its 14-day moving average for the first time since October 7, pointing to a possible shift in short-term momentum. The benchmark also broke through support at 1,220.

Wald said the S&P 500's 50-day moving average was now key support on the downside.

"You have got to cut it short at that 50-day moving average," he said. "If we can't hold the 50-day, which is around 1,190, it wouldn't be a very good technical picture."

Economic data showed the pace of growth in the U.S. manufacturing sector slowed in October, though improvement in new orders suggested resiliency in the sector.

"If we can keep Europe out of the headlines and Washington out of the headlines and just focus on the economic data and the corporate data we'd be in great shape," said John Canally, investment strategist and economist for LPL Financial in Boston.

In a move that put further pressure on commodity prices, Japan vowed to step into foreign exchange markets again. The government sold a record $98.7 billion on Monday in yen to curb its strength, which is hurting Japan's export-based economy.

The U.S. dollar index rose 1.5 percent. U.S. oil futures settled 1.07 percent down at $92.19, and copper prices fell 3 percent. Many commodities are priced in the greenback, making a spike in dollar prices more expensive for traders in other currencies and saps demand.

(Editing by Kenneth Barry)

"The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro," Papandreou told a late-night cabinet meeting, according to a statement released by his office.

"No one will be able to doubt Greece's course within the euro," he said, adding that market turmoil triggered by his announcement of the referendum late on Monday would be short-lived.

The euro and global stocks were pummeled on financial markets on Tuesday after Papandreou's move threw into question the survival of crucial efforts to contain the euro zone's sovereign debt crisis.

The leaders of France and Germany, caught unawares by Papandreou's high-stakes gamble, summoned him to crisis talks in Cannes on Wednesday to push, before a summit of the G20 major world economies, for quick implementation of the bailout deal.

But Papandreou said Greece's partners would support its policies and urged the G20 meeting to agree policies that "make sure democracy is above market appetites."

German Finance Minister Wolfgang Schaeuble told Wednesday's Financial Times Deutschland newspaper he was confident the Greeks would support the government's reforms in the referendum.

"If Greece accepts the burden and efforts required by the aid programs, if it wants to stay within the euro zone, then we will support it," Schaeuble said.

Papandreou most immediate hurdle is a confidence vote on Friday. He told the cabinet he believed he would both win the vote and hold the referendum as planned.

"WE WILL NOT BACK DOWN"

"We believe the government will once again win a vote of confidence in order to proceed with its plans," government spokesman Angelos Tolkas told reporters. "We will not back down on anything we have to do to save the country."

Six senior members of Greece's ruling PASOK socialists, angered by Papandreou's decision to call a plebiscite on the 130 billion euro rescue package agreed only last week, said he should make way for a "politically legitimate" administration.

During a cabinet meeting that lasted over 5 hours, some ministers backed Papandreou's decision, others questioned the timing of the referendum and criticized the fact they had been kept in the dark, and a handful were openly against it, government sources said.

"I think this was the wrong decision and we must take it back," one minister was quoted as saying. "We must not risk our position in the euro."

A leading PASOK lawmaker quit the party, narrowing Papandreou's slim majority to 152 of 300 seats, and several others called for a government of national unity followed by a snap election, which the opposition also demanded.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held.

Euro zone leaders last week thrashed out Greece's second financial rescue since last year, in return for yet more austerity, in the hope that it would ease uncertainty surrounding the future of the 17-nation single currency.

Instead, financial markets suffered another bout of turmoil on Tuesday due to the new political uncertainty and the risk that austerity-weary Greeks could reject the bailout. Opinion polls suggest most voters think it is a bad deal.

The euro fell almost half a U.S. cent to a session low of $1.3647 on Wednesday after Papandreou's latest remarks, showing that he had failed to ease market worries about the region's debt crisis.

ITALY DRAWN IN

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, raising Rome's borrowing costs to levels that proved unsustainable for Ireland and Portugal.

European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent.

Greece is due to receive an 8 billion-euro IMF/EU aid tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a "no" vote.

Dutch Finance Minister Jan Kees de Jager said the IMF might have difficulty paying out that tranche because of the looming referendum. "I can imagine it will be difficult for the IMF to decide about the tranche but there will be uncertainty ... it is problematic," he told the Dutch parliament.

European politicians expressed incredulity and dismay at Papandreou's announcement on Monday evening, which took even his own finance minister by surprise.

Ireland's European affairs minister, Lucinda Creighton, whose own country is struggling through an EU/IMF bailout program, said last week's European summit was meant to have dealt with the uncertainty in the euro zone.

"And this grenade is thrown in just a few short days later," Creighton said. "Legitimately there is going to be a lot of annoyance about it."

In a statement after French President Nicolas Sarkozy and German Chancellor Angela Merkel conferred by telephone, Sarkozy's office said France and Germany wanted to ensure the bailout package was implemented fast and in full. [nL5E7M11SG]

The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into throwing the euro zone a financial lifeline.

It could also further undermine dwindling political support in northern Europe for aiding Greece.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package.

DEFECTIONS

Papandreou said he needed wider backing for the budget cuts and structural reforms demanded by international lenders.

But the conservative opposition said an election was a "national necessity."

Lawmaker Milena Apostolaki quit the PASOK parliamentary group, reducing Papandreou's strength just before the vote of confidence. Another MP, Hara Kefalidou, said she also opposed the referendum but did not leave the group.

More importantly, senior PASOK lawmaker Vasso Papandreou, not related to the prime minister, asked the Greek president to work for a national unity government to ensure Athens receives the rescue funds, followed by an early election.

Papandreou did not even inform Finance Minister Evangelos Venizelos he was going to announce the referendum on the latest EU aid deal, a government official told Reuters.

On the markets, players scurried for safer investments, hammering stocks and punishing the euro.

The FTSEurofirst 300 index of top European shares was down almost 4 percent, due not only to the possibility of a hard Greek default but also to Europe's inability to stop the debt crisis spreading to bigger economies such as Italy.

Banks exposed to Greece and Europe's bigger, troubled economies, suffered most. Shares in France's Societe Generale tumbled 17 percent and Credit Agricole was down almost 12.5 percent.

In New York, Morgan Stanley, which investors worry has heavy exposure to Europe, fell 8 percent as the Dow Jones industrial average dropped almost 2.5 percent.

(Additional reporting by Ingrid Melander and Renee Maltezou in Athens, Michele Sinner in Luxembourg, Carmel Crimmins in Dublin, Martin Santa in Bratislava, Ana Nicolaci da Costa, Marius Zaharia, Jeremy Gaunt, Adrian Croft and Marius Zaharia in London, and Erik Kirschbaum and Madeline Chambers in Berlin; Writing by Dina Kyriakidou and David Stamp; Editing by Paul Taylor and Kevin Liffey)

At 5:34 a.m. EDT, futures for the S&P 500, Dow Jones and Nasdaq 100 were down between 0.9 and 1.6 percent.

The FTSEurofirst index of top European shares was down 2.6 percent, after Greek Premier George Papandreou said he will put Greece's bailout to a referendum, threatening to intensify the euro zone crisis.

Banks fell heavily with Italy's UniCredit down 7.4 percent. Credit Suisse was 8.2 percent lower after it posted a loss and said it was cutting 1,500 more jobs.

Most Asian stock markets fell. China's factory activity in October was its slowest since February 2009, according to the country's official purchasing managers' index, reminding investors of the risks to the world's No. 2 economy from a sagging global backdrop.

Japan vowed to step into foreign exchange markets again to curb excessive speculation a day after it reportedly sold a record 10 trillion yen ($128 billion) to tame its high-flying currency. Tokyo intervened after the yen repeatedly hit record highs against the dollar.

Among economic indicators, giving clues on the strength of the recovery in the world's biggest economy, the U.S. ISM Manufacturing Index will see a tick up from 51.6 to 52.0 for October, based on a Reuters poll of 70 economists, continuing a recovery after the first half slump.

Construction spending should see a 0.3 percent increase to follow a strong gain of 1.4 percent in August. The rise should be led by an increase in private residential spending.

The Federal Open Market Committee kicks off its two-day policy-setting meeting. The FOMC is likely to take a break from policy changes after two consecutive easing actions.

Pfizer, the world's biggest drugmaker, is expected to report slightly higher earnings of 56 cents per share from 54 cents per share, on higher sales of prescription medicines.

Other companies due to report include oil services firm Baker Hughes.

Wall Street closed its best month in 20 years on a down note on Monday as the failure of trading firm MF Global Holdings Ltd and new worries about Europe's debt crisis hammered financial shares.

The Dow Jones industrial average dropped 2.3 percent; the Standard & Poor's 500 Index fell 2.5 percent; the Nasdaq Composite Index lost 1.9 percent.

(Reporting by Brian Gorman)

Euro zone leaders agreed last week to hand Athens a second, 130 billion-euro ($179 billion) bailout and a 50-percent write-down on its huge debt. The price of the package is a program of harsh state spending cuts that have unleashed a tide of anger among Greeks.

Papandreou, whose ruling Socialist party has suffered several defections as it pushes waves of austerity measures through parliament while protesters rally outside, said he needed wider political backing for the fiscal measures and structural reforms demanded by international lenders.

A leader in German Chancellor Angela Merkel's center-right coalition said on Tuesday he was "irritated" by Papandreou's announcement.

"This sounds to me like someone is trying to wriggle out of what was agreed -- a strange thing to do," said Rainer Bruederle, parliamentary floor leader for the Free Democrats.

"One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and if it doesn't fulfill the agreements, then the point will have been reached where the money is turned off."

Analysts said the latest opinion poll showed a majority of Greeks took a negative view of the bailout deal.

The renewed uncertainty will be likely be an embarrassment for G20 leaders in France this week trying to coax China into throwing the euro zone a financial lifeline.

"If there was to be a referendum, we may reasonably conclude that they may not accept the austerity measures. We may conclude that it will bring the pack of cards tumbling down," Howard Wheeldon, senior strategist at BGC Partners in London, said.

Early reactions to the surprise move ranged from accusations that Papandreou was gambling with the country's future and predictions of default, to questions over the legality of the referendum and statements by lawmakers that a "No" vote would force his resignation and early elections.

Nobel prize-winning economist Christopher Pissarides caught the mood of uncertainty: "It is difficult to predict what will happen to Greece if they reject it. It will be bad enough for the European Union and the euro zone in particular, but it will be far worse for Greece.

"In the scenario of a 'No' vote Greece would declare bankruptcy immediately, they would default immediately. I can't see them staying within the euro," he said.

REFERENDUM ON MEMBERSHIP

"The situation is so tight that basically it would be a vote over their euro membership," Finland's Europe Minister Alexander Stubb told broadcaster MTV3.

Greek Finance Minister Evangelos Venizelos also warned citizens that euro zone membership was at stake. "It's crunch time," he told lawmakers on Monday.

"Citizens will have to answer the question: are we for Europe, the eurozone and the euro?"

Early on Tuesday, Venizelos checked into an Athens hospital with stomach pains but was expected to be discharged later.

Analysts were divided over whether Greek voters would accept the deal, but agreed that a damaging month or two of market volatility lay ahead while pollsters repeatedly took the Greek voters' pulse and European leaders looked on nervously.

The immediate market reaction to the announcement was negative, the euro extending losses against the dollar and tumbling more than 2 percent to a session low.

European shares were seen opening lower on Tuesday.

Opposition New Democracy leader Antonis Samaras will visit President Karolos Papoulias on Tuesday to discuss developments and push for snap elections, party officials said.

"Mr. Papandreou is dangerous, he tosses Greece's EU membership like a coin in the air," party spokesman Yannis Michelakis said. "He cannot govern and instead of withdrawing honorably, he dynamites everything."

UP TO THE VOTERS

Papandreou told the Greek voters it was up to them to decide the country's fate.

"We trust citizens, we believe in their judgment, we believe in their decision," he told Socialist party deputies. "In a few weeks the (EU) agreement will be a new loan contract... we must spell out if we are accepting it or if we are rejecting it."

Papandreou, grappling with Greece's worst financial crisis in 40 years, said the referendum would take place in a few weeks. Finance Minister Evangelos Venizelos told Greek TV it would probably be held early next year.

Opposition parties accused Papandreou of looking for a way out for his embattled party by dragging Greece, which has seen violent clashes between anti-austerity protesters and riot police, through a lengthy period of political instability.

"I never expected Papandreou to take such a dangerous and frivolous decision," said Dora Bakoyanni, former foreign minister and leader of the small center-right Democratic Alliance party. "All the international media will say that Greece itself is putting the EU deal at risk."

Greek newspapers on Tuesday also harshly criticized Papandreou for his choice. "More uncertainty is the last thing that Greece needs right now," said conservative newspaper Kathimerini in its lead editorial.

"The country will certainly paralyze amid endless debates -- the government, the state apparatus and institutions won't work," the newspaper added.

Papandreou also said he would ask for a vote of confidence to secure support for his policy for the rest of his four-year term, which expires in 2013.

Analysts said he was likely to win that, despite dissent among his parliamentary team, and parliament officials said the confidence debate would begin on Wednesday, with a vote on Thursday or Friday.

MONEY RUNNING OUT?

Greece is due to receive an 8 billion-euro tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a "no" vote.

Germany issued a statement saying the EU was working hard to put the second Greek aid package in place by the end of the year and had no comment on the referendum.

Swinging opinion polls would leave markets fluctuating and Greece's EU partners dangling.

A survey carried out on Saturday showed that nearly 60 percent of Greeks viewed the agreement on the bailout package as negative or probably negative.

But David Lea of Control Risks struck a more positive note. "It's all in the question. If he can frame it as a sufficiently apple-pie issue, he stands some chance of winning," he said.

Some parliamentarians questioned the legality of the planned plebiscite under the constitution, which does not allow referendums on economic issues, only on matters of great national importance.

The last time Greeks held a referendum was in December 1974, when they voted to abolish the monarchy shortly after the collapse of a military dictatorship.

To be binding, a referendum result requires a minimum 40 percent turnout on issues of "crucial national importance" and 50 percent on a law that has already been voted on in parliament and "regulates a serious social issue," according to legislation enacted this year. It was not clear which option the government would favor.

"If the referendum answer is no, Papandreou has to resign," said Costas Panagopoulos, an analyst at polling firm Alco.

"In the meantime what will happen with the decisions the EU took last week? I cannot understand what the prime minister wants to do."

(Additional reporting by Ingrid Melander; Writing by Dina Kyriakidou; Editing by Andrew Roche)

A retreat from riskier assets boosted the dollar, although it slipped from Monday's three-month peak against the yen that followed Japan's record one-day currency market intervention estimated by local media at as much as 10 trillion yen ($128 billion).

The euro came under renewed pressure amid growing doubts about the effective implementation of a plan agreed just last week to contain Europe's debt crisis, while European stock markets were expected to fall.

The single currency has given up all of the gains made in a run to as high as $1.4247 last Thursday after the debt deal was announced.

Greek Prime Minister George Papandreou's decision to call a referendum could result in a snap election if the public, angry with harsh austerity measures, rejects the deal, and possibly trigger a default, analysts said.

Investors fear the Greek move could undermine Europe's efforts to stop its sovereign debt woes from spreading, just when jitteriness has put Italian bonds under renewed pressure, with 10-year yields rising back above 6 percent.

Financial bookmakers in London called the FTSE 100 index .FTSE to open down 1.1 percent, while Germany's DAX .GDAXI was seen down 1.2 percent and France's CAC-40 .FCHI down 1.1 percent. .EU

RIPE FOR PROFIT-TAKING

MSCI's broadest index of Asia Pacific shares outside Japan fell 1.6 percent on Tuesday, after its best monthly gain since May of more than 12 percent in October, helped by last week's huge rally on a long-awaited European rescue plan.

Japan's Nikkei .N225 share average closed down 1.7 percent. .T

Traders said Asian stocks were generally ripe for profit-taking after a sharp rally last week on relief that European leaders had at least come to an agreement on a basic framework to help reduce Greece's huge debts, boost the region's bailout fund and strengthen banks.

A slightly weaker-than-expected pick-up in China's factory activity as shown by the official purchasing managers' index (PMI), which fell to 50.4 in October from September's 51.2, provided another excuse for selling, sending Hong Kong's benchmark Hang Seng index .HSI down 1.9 percent.

China's factory activity in October was its slowest since February 2009, reminding investors of the risks to the world's No. 2 economy from sagging global growth.

The data sent the risk-sensitive Australian dollar and the euro lower as well, but gold, perceived as a safe haven asset, was underpinned as other riskier assets slid.

"The China data was disappointing, but it shows growth is continuing", although at a lower rate than previously expected, said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.

DOWNSIDE RISKS

Australian shares fell .AXJ0 1.5 percent and the currency fell 0.9 percent after the Reserve Bank of Australia cut its main cash rate by 25 basis points to 4.5 percent, the first easing since early 2009, as it reacted to benign inflation at home and downside risks to global economic growth.

"The concerns in Europe are having a negative impact on the global economy which in turn is impacting Australia, particularly through a drop in confidence. The RBA has taken this into account," said Glenn Baker, CFO at ING Direct.

The MSCI world equity index dropped 2.4 percent on Monday, pulling back from its highest levels in nearly three months hit last week, but gained 10 percent in October for its biggest one-month rise since April 2009.

U.S. stocks fell as the spike in the U.S. dollar weighed on commodity prices, sending the Standard & Poor's 500 Index .SPX down 2.5 percent on Monday. Despite the losses, it posted its biggest monthly percentage rise since December 1991.

The euro slipped about 0.3 percent on Tuesday to around $1.3820, while the dollar index .DXY, which measures the U.S. currency against a basket of six major peers, rose 0.6 percent.

The firmer dollar helped trim earlier gains in gold, which was up 0.2 percent on Tuesday after losing nearly 1 percent the day before, while oil slipped.

Asian credit markets weakened on Tuesday, as renewed worries about Europe and rising Italian bond yields led to a sharp widening of the spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning. The spread widened by 12 basis points from Monday.

(Additional reporting by Ian Chua in Sydney; Editing by Alex Richardson)