The market tension came after a German politician suggested Greek finances are so bad the nation might have to leave the coalition of 17 countries that use the euro as their common currency.
In addition, the German economy minister published an op-ed arguing that an “orderly bankruptcy” of Greece must be an option. Greece has been relying on international bailouts to keep it solvent.
Germany’s opinion on the Greek crisis is taken seriously because Germany has the strongest economy in Europe. A spokesman for Chancellor Angela Merkel played down both suggestions, but financial markets were spooked anyway.
The Stoxx 50 index of blue-chip European stocks fell 2.6 percent. In the United States, the Dow Jones industrial average was down 167 points, or 1.5 percent, before turning around late in the day to close up almost 70.
“With German officials seemingly in destructive overdrive, as per all the public talk of preparing for a Greek default and even a Greek euro exit, markets can hardly be blamed for the latest charge for the bunker and tin hats,” said Marc Ostwald, market strategist at Monument Securities.
Bank stocks were hit hard. In Europe, Deutsche Bank of Germany and BNP Paribas of France were down 11 percent each at one point. Societe Generale, another large French bank, closed down 10.8 percent.
Investors are worried because banks have lent billions of dollars to Greece and other troubled European nations. And American banks have lent money to their European counterparts, so the United States could be hurt if European countries go broke.
In addition, a new recession in Europe would hurt the U.S. because American companies rely on Europe for a big portion of their exports. The American economy is already growing so slowly that it wouldn’t take much to push it back into recession.
The stock sell-off “reflects heightened investor fear that Greece is on the verge of defaulting, which could plunge the weak global economy back into another Lehman-esque recession,” said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.
He was referring to the collapse of Lehman Brothers, the American investment bank, in 2008. When it failed, banks tightened lending severely, and panic swept the financial markets.
Kurt Karl, chief U.S. economist at Swiss Re, puts the chances of a chaotic Greek default at only 10 percent.
“European leaders tend to come to a solution before we get to that point,” Karl said.
And the U.S. financial system is in better shape than in 2008. Banks have more capital in reserve than they did three years ago. And U.S. money market funds have been steadily cutting back their exposure to European banks.
U.S. Treasury Secretary Timothy Geithner will attend a meeting of European finance ministers Friday in Poland, Treasury officials said. He said last week that Europe had “more work to do” to get the debt crisis under control.