Dow drops 297 as Greek referendum announcement shocks stocks

— -- Stocks continued suffering Tuesday, with the Dow Jones industrial average collapsing nearly 300 points, or 2.5%, on news the pact to hold the euro together may be crumbling.

The market rout came after an unexpected move by Greek Prime Minister George Papandreou to call a referendum on an agreement reached last week to shore up the euro. The multi-nation agreement, which would result in major economic belt tightening by Greece, is largely unpopular in the indebted nation.

Tuesday's big losses extended a losing day for stocks on Monday, where stocks lost 2.5%. U.S. stocks are now down more than 4% over the past two days. Key European indexes including France's CAC 40 and Germany's DAX fell 5% or more Tuesday alone.

"If Greece thumbs its nose at the rest of the EU over this bailout, we go back to where we were before last week's euphoria," says Charles Crane of Douglass Winthrop Advisors. "It's pretty darn disruptive, but could it get worse? Yes."

Investors are now dealing with the increased threat the Greek debt crisis could get much worse. Putting the unpopular pact to a vote makes a "disorderly" default by Greece more likely, debt rating agency Fitch Ratings said.

The market continues to overreact to events in Europe as the situation is so unpredictable, says Andy Brooks, trader at T. Rowe Price. "There are lot of big complicated global issues investors are being challenged by," he says.

Investors are frustrated that what seemed like a quick fix to Europe's problems will take time to mend. "These problems were a long time in the making and will take a long time to mend," says Michael Farr of Farr Miller & Washington. There's also the fear that Europe's economic woes could spill over to injure the U.S., he says.

"We will get through this," he says. "But to suggest this isn't going to be a bumpy road isn't realistic."

According to preliminary calculations, the Dow plunged 297.05 to 11,657.96. The Standard & Poor's 500 index dropped 35.02, or 2.8%, to 1218.28 and the Nasdaq composite index shed 77.45, or 2.9%, to 2606.98.

Investors continued to race for safety and bought U.S. Treasuries. The prices on 10-year Treasuries soared, pushing the yield down from 2.12% to 1.96% its lowest level since Oct. 6, says Bloomberg News.

Meanwhile, investors are dealing with questions over the shock caused by the default of large investment management firm, MF Global Holdings.

The company, led by former New Jersey governor Jon Corzine, filed for bankruptcy after concerns about the company's holdings of European government bonds caused its business partners to pull back from the firm and ratings agencies to downgrade its debt.

European market indexes fell even more than U.S. stocks. Germany's DAX index fell 4.8% and France's CAC-40 fell 5.4% .

French banks have large holdings of Greek government bonds and would be exposed to severe losses if Greece goes through a disorderly default on its debt. Societe Generale plunged 16% in Paris trading and BNP Paribas lost 11%.

The two-day drop comes after U.S. stocks closed out their best month in nearly 10 years. The S&P 500 rose 10.8% in October, the biggest gain since December 1991.

Earlier in Asia, stocks fell sharply. Japan's Nikkei 225 index retreated 1.7%. Hong Kong's Hang Seng lost 2.5% and Australia's S&P/ASX 200 shed 1.5%. Benchmarks in Singapore, India, Indonesia and Thailand were also down. South Korea's Kospi gained marginally and China's Shanghai Composite Index added 0.1% .

Contributing: Associated Press