The S&P/TSX composite index fell 126.47 points to 12,395.24 as traders worried that such a development could play havoc with the financial sector and punish commodity prices. The TSX Venture Exchange was down 12.63 points to 1,576.29.
The Canadian dollar was off 0.25 of a cent to 99.02 cents US despite a stronger than expected retail sales report for November.
Statistics Canada said sales rose a better than expected 0.3 per cent to $38.7 billion. It was the fourth consecutive month that retail sales increased and the results beat economists' expectations for a 0.2 per cent rise.
The agency said that seven of 11 retail subsectors, representing 65 per cent of total retail sales, reported gains.
U.S. markets were generally weak with the Dow industrials down 33.07 points to 12,675.75.
The Nasdaq composite index rose 2.47 points to 2,786.64 and the S&P 500 index declined 1.37 points to 1,314.63.
Buying sentiment was muted after finance ministers of countries that use the euro announced that Greece would pay less than four per cent interest on the new bonds creditors will get in a debt swap meant to cut what the country owes by about €100 billion.
That interest rate is below what the creditors have been willing to accept.
In response, the head of the group that represents the country’s private creditors — banks and other investment firms — warned that the future of Europe is threatened if a voluntary debt reduction deal over Greece is not reached.
Banks that hold Greek debt have already been asked to take a 50 per cent loss on those investments and some think even that writedown isn't big enough.
A deal between the Greek government and the banks that hold Greek national bonds is considered crucial to the stability of the European financial system. Investors fear that if Greece can’t pay its debt, it could trigger a panic.
Time is running out as Greece has several billions of euros in debt coming due in March.
On the earnings front, Canadian National Railway Co. (TSX:CNR) shares were off $3.74 to $75.86 even as the company announced it was raising its quarterly dividend by 15 per cent to 37.5 cents per share. CN generated a quarterly profit of $592 million in the fourth quarter of 2011 as revenue rose 12 per cent from a year before to a record $2.38 billion.
However, the company’s operating ratio — reflecting how much of CN’s revenue is required to pay for its operating activities — was 64.7 per cent, up 1.3 points from the fourth quarter of 2010 although still extremely low by industry standards.
McDonald's net income rose by 11 per cent in the fourth quarter to US$1.38 billion or $1.33 a share. Revenue jumped 10 per cent to $6.82 billion, slightly above expectations of $6.81 billion but its shares slipped $2.20 to US$98.75.
Health-care products company Johnson & Johnson reported fourth-quarter net income slumped 89 per cent to US$218 million or eight cents a share. Excluding special items, adjusted earnings per share were $1.13, four cents better than forecast. Sales narrowly missed expectations, coming in at $16.26 billion and its shares were unchanged at US$65.
Traders also took in a glum report from the International Monetary fund which said recession in Europe will slow the global economy this year.
The IMF forecasts global growth of 3.25 per cent this year, slower than the four per cent pace it projected in September, which doesn't bode well for earnings and revenue growth.
"The world we're living in is one in which revenue growth is going to be very constrained even if the GDP readings are positive," said John Johnston, chief strategist at David Rea Ltd..
"And that tells us with all the cost cutting that the trend growth rate in earnings for the next several years is going to be in the low to mid single digits."
The latest round of worries about the Greek debt crisis pushed the financials sector down one per cent as Scotiabank (TSX:BNS) stepped back 59 cents to $53.96 while Royal Bank (TSX:RY) dropped $1.03 to $53.79.
Uncertainty over a Greek debt deal also depressed commodity markets, with the March crude contract on the New York Mercantile Exchange losing 63 cents to US$98.95 a barrel.
The TSX energy sector lost 0.6 per cent as Talisman Energy (TSX:TLM) gave back 36 cents to C$12.14 and Imperial Oil (TSX:IMO) fell 79 cents to $47.19.
The base metals component eased one per cent as March copper gained a cent to US$3.81 a pound. Ivanhoe Mines (TSX:IVN) dropped 77 cents to C$17.53 and Lundin Mining (TSX:LUN) declined 27 cents to $4.96.
The gold sector declined about 1.9 per cent while gold prices also fell with the February contract in New York down $13.80 to US$1,664.50 an ounce. Barrick Gold Corp. (TSX:ABX) faded $1.33 to C$45.95 and Iamgold (TSX:IMG) shed 33 cents to $15.55.
Investors continued to express their unhappiness over the management shakeup at Research In Motion (TSX:RIM) that saw co-CEOs Jim Balsillie and Mike Lazaridis step down. They were unimpressed after the new CEO, Thorsten Heins, told analysts he didn't think drastic change was needed at the BlackBerry maker. Its shares fell 50 cents or 3.19 per cent to $15.17 on top of a slide Monday of more than nine per cent.
Elsewhere in the tech sector, semiconductor maker Gennum Corp. (TSX:GND) said Monday that it is being acquired by Semtech Corp.(Nasdaq:SMTC) for $500 million. Gennum stockholders will receive $13.55 in cash for each common share. On Tuesday, Gennum shares soared $7.30, or 118.7 per cent, to $13.45.