Wall St. falls on Greek default fears, volatility spikes

(Reuters) - U.S. stocks extended their losses in heavy trading on Monday after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.

Greece appeared to confirm it was heading for a default after a government official said the country would not pay a 1.6 billon euro loan installment due to the International Monetary Fund on Tuesday.

The European Central Bank froze funding to Greek banks, forcing Athens to shut banks for a week to keep them from collapsing.

All three major U.S. indexes fell more than 1 percent for the first time since May 26 and the Dow Jones Industrial Average <.DJI> turned negative for the year to date. Its last annual decline was 2008.

Volatility rose sharply and nine out of 10 S&P sectors retreated while the Global X FTSE Greece exchange-traded fund , which tracks the Athens stock market, was down 18 percent. In Europe, the blue-chip Euro STOXX 50 index <.STOXX50E> had suffered its biggest one-day fall since 2011.

"There is no mechanism to be ejected from the European Union. This has never happened before," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago. "When you don't know what could happen you sell. You get on the sidelines."

While the Greek economy is small and most U.S. corporations have limited direct exposure, investors are concerned about the fallout across Europe if Greece exits the euro zone.

Traders said U.S. markets could fall further as investors worry that a sharp decline in the European currency caused by a deepening Greek crisis would upset U.S./European trade.

A snap Reuters poll of economists and traders found a median 45 percent probability that Greece would leave the euro zone.

Adding to the uncertainty on Monday, Chinese stocks had closed sharply lower after a volatile day of trading despite surprise monetary easing by the central bank.

Concerns about Puerto Rico and its ability to pay its debts also worried investors.

The Dow Jones industrial average <.DJI> fell 262.14 points, or 1.46 percent, to 17,684.54, the S&P 500 <.SPX> lost 32.56 points, or 1.55 percent, to 2,068.93 and the Nasdaq Composite <.IXIC> dropped 92.61 points, or 1.82 percent, to 4,987.90.

The CBOE Volatility index <.VIX>, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped as much as 31 percent to 18.41, its highest level in more than four months.

Financials <.SPSY> weighed down the S&P 500 with a 1.9 percent decline. U.S. banks have an exposure to $12.7 billion of Greek debt.

Wells Fargo , down 1.9 percent, was the biggest drag on the financial index. Goldman Sachs weighed the most on the Dow with a 2 percent decline.

Assured Guaranty fell 15.4 percent and MBIA Inc fell more than 20 percent after BTIG downgraded the insurers on concerns over Puerto Rico's debts.

Declining issues outnumbered advancing ones on the NYSE by 2,774 to 340, for a 8.16-to-1 ratio on the downside; on the Nasdaq, 2,324 issues fell and 464 advanced for a 5.01-to-1 ratio favoring decliners.

The benchmark S&P 500 index was posting 2 new 52-week highs and 21 new lows; the Nasdaq Composite was recording 47 new highs and 100 new lows.

(Additional reporting by Saqib Ahmed in New York; Editing by Saumyadeb Chakrabarty and Meredith Mazzilli)

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