Greece rattles Europe; Markets close sharply down

European equities closed sharply lower on Monday as fears rose that Greece could be the first country to exit the euro zone, after instigating capital controls.

The pan-European STOXX 600 closed around 2.7 percent lower. Peripheral stock indexes led losses, as Portugal's PSI 20 and Italy's FTSE MIB closed down more than 5 percent.

The benchmark FTSE 100 for the U.K., which is outside the euro zone, closed down just under 2 percent. The French CAC and the German DAX both closed well over 3 percent lower.

Greece's main stock exchange was closed on Monday and will not reopen until July 6, with banks across the country also shut.

This came after Athens imposed capital controls over the weekend to prevent a run on the country's banks. It also said it would hold a referendum this Sunday on the bailout terms proposed by its international creditors.

A vote rejecting the bailout, which is conditional on further austerity measures, could lead to Greece's exit from the euro zone, setting a dangerous dangerous precedent for the single currency area.

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Greece also faces default if it does not repay 1.5 billion euros ($1.7 billion) to the International Monetary Fund on Tuesday.

"(Greece's Prime Minister Alexis) Tsipras needs markets to be destabilized to put pressure on Brussels. Things are a bit destabilised but we haven't gone over a cliff," Art Cashin, director of floor operations at UBS, told CNBC.

Banking stocks outside Greece bore the brunt of the sell-off in regional stock markets. Portugal's Banco Comercial Portugues tanked more than 11 percent, while Italy's Banca Monte Dei Paschi Di Siena (BMPS) tumbled 10 percent.

In the U.S., Wall Street shares were broadly in the red as investors reacted to the developments in Greece. The blue-chip Dow Jones industrial average was last down about 1.3 percent.

Tunisia terror hits stocks

Shares of travel group Tui were at the bottom of the FTSE 100 on Monday, down more than 7 percent, following a fatal terror attack on a Tunisian beach resort last Friday. The death toll neared 40 over the weekend, with U.K. citizens accounting for at least 18 of the tourists killed by an armed gunman.

U.K. travel agent Thomas Cook was also hit, closing down around 3.7 percent.

Elsewhere, the European Commission's economic sentiment figures for the euro zone fell slightly from 103.8 in May to 103.5 in June. Consumer confidence in the region came in unchanged.