European stocks fell again on Tuesday, extending the previous session’s decline as Greece looked set to default on an international loan ahead of a weekend referendum that could pave the way for its exit from the euro.

The pan-European FTSEurofirst 300 index was down 1 per cent at 1,515.51 points by 0743 GMT, extending falls after a 2.8 per cent slump on Monday. The Euro STOXX 50 fell 0.9 per cent.

With Greece hours away from defaulting on a €1.6 billion loan from the International Monetary Fund, tens of thousands of Greeks rallied on Monday to back their left-wing government in a clash with foreign lenders which has pushed Greece close to financial chaos and forced a shutdown of its banking system.

While European Commission president Jean-Claude Juncker made a last-minute offer in a bid to reach a deal before Tuesday’s deadline, there was little sign that Greek Prime Minister Alexis Tsipras was prepared to drop his repeated rejections of the bailout offer.

“Greece will almost certainly default on the International Monetary Fund (IMF) on Tuesday and watch its bailout programme and the offer from its creditors fizzle away,’’ said David Stubbs, Global Market Strategist, J.P. Morgan Asset Management.

“After that, the country and the euro zone will truly step into the unknown.’’

Euro zone stocks suffered their biggest one-day fall since 2011 on Monday, with southern European banks in particular getting pummelled after Greece shut its banks and imposed capital controls.

Juncker said if Greeks rejected an offer from creditors to save them from bankruptcy in Sunday’s referendum, it would be taken as a signal that they wanted to quit the euro.

The Athens stock market and main stock index are set to remain shut on Tuesday.

Euro zone banks steadied after a 5.8 per cent slump on Monday, edging down 0.9 per cent. Investors said that, while the situation would be volatile in the short-term, the European Central Bank’s attempts to battle deflation through asset purchases would ultimately support the sector.

“We expect the short-term pain injected into markets by Greece will lead to medium-term gains as we believe contagion will be limited,’’ strategists at Morgan Stanley said in a note.

“The reflation trade should reassert itself after a pause and we would look to buy financials on weakness.’’

Underperforming the market was the luxury sector, with Christian Dior down 4.7 per cent, the top FTSEurofirst 300 faller.

LVMH and Tod’s fell 2.8 per cent and 2 per cent, respectively after all three firms were downgraded to “underperform’’ from “neutral’’ by Bank of America/Merrill Lynch after they lowered earnings estimates for the luxury sector.

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