Stock markets fall amid Greece concerns

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Stock markets have fallen sharply ahead of an EU meeting, as concerns mount over Greece's future in the euro.

Shares fell after a report quoted former Greek Prime Minister Lucas Papademos saying that the Greek government may be making preparations for leaving the euro.

Markets in Italy and Spain closed down 3.7% and 3.3% respectively. London, Paris and Frankfurt fell more than 2%.

The euro also fell to a 22-month low against the dollar.

The single currency tumbled below the $1.26 mark for the first time since August 2010, falling more than 1.5 cents to $1.2571.

In New York, the Dow Jones ended little changed, down 6.7 points.

Adding to the negative mood, Germany's central bank said the developments in Greece were "highly alarming".

"Greece is threatening not to implement the agreed reforms and consolidation measures," the Bundesbank said in its latest monthly report.

It said that scenario could create "substantial" challenges for the eurozone and Germany, but the situation would be "manageable via careful crisis management".

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Greece is likely to be discussed at a meeting of European Union leaders that opened in Brussels on Wednesday evening.

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It will be the first time the new French President, Francois Hollande, has attended an EU gathering of this kind.

It is thought that Mr Hollande will push for the creation of pan-European bonds.

That would allow struggling nations such as Spain and Italy to borrow much more cheaply on international money markets.

But German Chancellor Angela Merkel will not consider such a scheme until other EU nations have improved their finances and shown greater budget discipline.

Germany can borrow extremely cheaply on the money markets.

In an auction on Wednesday morning, it borrowed 4.56bn euros ($5.76bn) for two years at a record low interest rate of 0.07%.

'Greece has to do more'

European markets opened lower after comments made by former Greek Prime Minister Lucas Papademos appeared to spook investors.

"It cannot be excluded that preparations are being made to contain the potential consequences of a Greek euro exit," he said in an interview with Dow Jones Newswires.

"The risk of Greece leaving the euro is real and it depends effectively on whether the Greek people will support the continued implementation of the economic programme," he said.

Despite the prospect of Greece leaving the euro, the head of the International Monetary Fund, Christine Lagarde, is keeping up the pressure on Greece to fix its finances.

In an interview with the BBC's Today programme, Ms Lagarde said: "The Greek population has made huge efforts. But they have more to do. There are more structural reforms to be had, there is more tax to be collected and that has a price."

Greek politicians are divided over whether to continue supporting the deeply unpopular austerity measures imposed on the country by the IMF and EU in return for bailout funds, and face a 17 June election.

Many analysts think that Greece may abandon the austerity measures and be forced out of the euro.

Ms Lagarde said the IMF did not like that prospect but was "prepared for all possible situations".

But she said that the costs of Greece leaving could be so high that other members of the eurozone might be prepared to pay more to keep it in the euro.

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