(CNN) -- The eurozone faces its toughest crisis to date as the credit downgrade in Greece spooked global investors and raised the specter that the debt crisis may spiral to other European economies.
Markets from London to New York and Tokyo all tumbled in the immediate wake of Standard & Poor's downgrade of Greece's debt to junk status on Tuesday; the FTSE 100 dropped 2.6 percent before recouping losses.
The Dow Jones Industrial Average fell 213 points to below 11,000 in early trading Tuesday before rallying into positive territory.
Japan's Nikkei closed down 2.57 percent and Hong Kong's Hang Seng index ended the day down 1.47 percent. Markets in Shanghai and Australia were also in negative territory.
European markets followed Asian indexes into the red Wednesday. London's FTSE-100 fell but pulled back into positive territory, but Frankfurt's DAX, and the Paris CAC 40 were all down and Spain's IBEX fell by more than 1 percent.
Greek officials Wednesday morning banned the practice of short selling on the Athens stock exchange as a way to keep speculators from hurting Greek shares even more. The ban will last for two months, until June 28, the Hellenic Capital Market Commission said.
The junk downgrade of Greece's sovereign debt came as a planned bailout by European nations and the International Monetary Fund faced increasing opposition in Germany -- the largest economy of the 16 nations united under the euro currency -- and increased rancor in Greece regarding planned austerity measures to reduce the nation's debt, which stands now at 13.6 percent of the nation's gross domestic product.
Q&A: What does Greece's debt rating downgrade mean
The euro dropped to its lowest level in nearly a year in Wednesday trading in Asia, where it fell to as low as $1.31.
The junk rating now makes it much more difficult and expensive for Greece to try to raise money and debt in world markets. Standard & Poor 's also reduced the debt credit rating of Portugal, heightening fears of a "Greek contagion" that could spread to other European nations.
Greek austerity measures prompt strike
"It's like a domino effect," David Buick of BGC Partners in London told CNN. The downgrade increases the likelihood of a double-dip recession "which we all hope to avoid," he added.
"This is a dangerous process," he said. "All the speculators out there -- they're like rats up a drain pipe -- will make those cracks (in the Eurozone economies) into crevices."
After the credit downgrade, the IMF is considering raising its share of planned assistance to Greece by $10 billion for a total of more than $73 billion. But some analysts say Greece will need even more time and cash to avoid defaulting on its debt payments.
German Chancellor Angela Merkel said Wednesday that Germany would do what it can to help Greece out of the financial "but also Greece has to do its part."
"Obviously what Greece has to do is a difficult thing, but I think they are committed to doing it," the head of the International Monetary Fund, Dominique Strauss-Kahn, said in an appearance with the German leader.
Defaulting on its debt payments is not an option Greece wants to consider if it is to remain among the eurozone economies, former Greece Economics Minister Yiannos Papantoniou told CNN. It also raises the chance strong economies like Germany may walk away from the euro as its currency.
* Standard & Poor's is among a handful of credit rating agencies who gauge the ability of the issuer to repay debt
* Top rating is AAA
* Anything less than a BBB rating is considered "speculative," or in the parlance of the markets: junk
* Greece sovereign debt is now rated BB+, the same as Azerbaijan, Egypt and Panama
Default and restructuring the debt "is the way out of the euro ... [and] will inflIct lasting damage to Greece because Greece will get a bad name and stigma in the markets for years to come as Argentina has done," Papantoniou said. "Moreover, I'm sure that if Greece is forced to restructure its debt, Germany will come and say, 'Unfortunately gentlemen we can't be part of the same monetary union because your paper is undervalued and ours is strong.'"
Papantoniou was optimistic a bailout would come before Greece defaulted on its debt payment. "This will definitely give some breathing space -- but the problem doesn't end there," he said. "Next year in 2011 Greece will have to go back to the markets and be able to borrow at reasonable rates."
Analysts said it was likely Greece would also need more time to reduce its debt levels. "Anyone who thinks they can take that rickety economy ... and pull it around in one year, they're on a different planet," Buik said.
The pace of the Greece bailout negotiations, which started in January, has exasperated some market watchers.
"I think we're already in pretty disastrous territory even before these latest problems arose," said Vanessa Rossi, a senior research fellow at Chatham House. "Having taken ... several months to even get to the point which Greece is asking for a bailout and assistance -- and now we're not even sure if they're going to get it and under what terms --is a real disaster in and of itself."
Kirby Daley, senior strategist for Newedge Group, believes the negotiations between the IMF and Germany are slow because the Greece bailout may turn into a blueprint for future bailouts of eurozone nations. "Greece is setting the standard ... whatever they do there, then they may face the same funding levels for Portugal, Spain and Italy."
Moreover, the risks placed on the credit worthiness of Greek debt may risk investor appetite in sovereign debt of nations like the UK, the United States and Japan, Daley said.
"We've been hearing about these issues for years about our kids paying for our debts ... but now it's not our kids, it's us," Daley said.
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