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A man walks past a screen showing the Hong Kong's Hang Seng index which lost 2.16 percent to 20,806.25 outside a bank in Hong Kong Tuesday, March 6, 2012.Kin Cheung

Markets fell sharply on Tuesday, handing stock investors their worst day in months on renewed fears of a disorderly default in Greece and concerns that China's slowdown would hit global growth.

Analysts have expected a pullback for weeks, citing an overstretched market. Despite the day's decline, the S&P 500 is still up almost 7 per cent for the year. If fourth-quarter gains are included, the benchmark index is still up almost 20 per cent since Sept. 30.

Wall Street's anxiety gauge, the CBOE Volatility Index or VIX, jumped about 16 per cent to near 21, rising above its 50-day moving average for the first time since November.

Equities' recent rally has continued without a substantial pullback since December, supported in part by expectations that Europe's credit crisis would be contained and China's economy could avoid a hard landing.

"It might be just the time we have a bit of pullback here as this market begins to reassess what the future growth prospects for the year look like," said Burt White, managing director and chief investment officer at LPL Financial in Boston.

Toronto's S&P/TSX composite index tumbled 225.31 points, or 1.8 per cent, to 12,298.63. The Canadian dollar fell 0.64 of a cent to 99.94 cents U.S.

On Wall Street, the Dow Jones industrial average slid 203.66 points, or 1.57 per cent, to 12,759.15 at the close. The Standard & Poor's 500 Index dropped 20.97 points, or 1.54 per cent, to 1,343.36. The Nasdaq Composite Index fell 40.16 points, or 1.36 per cent, to 2,910.32.

Europe's downturn appeared ready to turn into a full-fledged recession due to a collapse in household spending, exports and manufacturing in the final months of 2011, the European Union said.

Brazil's gross domestic product expanded by a meagre 2.7 per cent in 2011, data showed Tuesday, adding to concerns after China cut its growth outlook earlier in the week. Expected growth in emerging markets has been a main catalyst for equities' gains.

A group representing Greek bondholders warned a default could cause more than €1-trillion ($1.3-trillion U.S.) of damage to the region. Creditors have until Thursday night to accept a bond swap in which they would lose almost three-quarters of the value of their bonds.

As part of a reassessment of possible collateral damage if the Greek deal with private debt holders collapses, traders sold the stocks of large banks on concern about their exposure to Greece.

The S&P financial sector index dropped 2.5 per cent and the KBW bank index fell 2.7 per cent.

Greece has no plans to extend the deadline on its bond-swap offer to private creditors, officials said, dismissing market rumours that the date may be changed to increase participation in the offer.

Basic materials stocks also tumbled as commodity prices fell, pressured further by a stronger U.S. dollar.

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