By Josie Cox 

Talks between Greece and its European creditors collapsed over the weekend, sending shock waves through European markets Monday.

By midday, the Stoxx Europe 600 index was trading around 1.2% lower, weighed down by a 1.6% slide on Germany's DAX-30. Athens' main stock exchange was slightly less than 5% lower on the day, led by a steep decline in banking stocks.

The falls came after European officials on Sunday dismissed the Greek government's latest proposals, describing them as "vague and repetitive." Last week the International Monetary Fund pulled out of the Greek bailout talks, citing lack of progress.

"We have always argued that a Greek deal would only occur at one minute to midnight," Rabobanks rates strategists wrote in a note. "Yet it now looks like 23:58 and counting."

Greek bank stocks were hit particularly hard, with shares in Alpha Bank AE, Eurobank Ergasias SA, National Bank of Greece SA and Piraeus Bank SA all down between 6% and 15% by midday. Monday's drop means they have now all declined more than 19% since the start of June. So far in 2015, all are nursing losses of between 35% and 65%.

Greek bonds also tumbled, sending the yield on the country's two-year debt up to almost 28%, more than 3 percentage points higher on the day and at a level last seen in late April. Yields rise as bond prices fall.

Concerns about Greece also hit the euro, which was trading around 0.2% lower on Monday, at around $1.124 to the buck. Several strategists said that the currency would likely remain under pressure until a resolution is found.

"Creditors are getting tired with the negotiations," said Eirini Tsekeridou, an analyst at Swiss private bank Julius Baer. Ian Williams, economist and strategist at brokerage Peel Hunt, said that hopes for a compromise are diminishing, while strategists at BNP Paribas wrote in a note that "the risk of unfavorable scenarios, such as a default, has undoubtedly risen."

Attention this week will be on Thursday's Eurogroup meeting, ahead of a Brussels summit on June 25, and a hefty Greek debt repayment deadline on June 30.

Credit Suisse economists said Thursday's meeting would likely be "one of the last chances to rubber stamp an agreement between Greece and its creditors."

"With the Greek government still living in its own world, hopes for a solution are evaporating," said Demetrios Efstathiou, a senior economist at Standard Bank. He added, however, that he still thinks an agreement will be reached, but only "at the very last minute" and "not a minute earlier."

Back in debt markets, the yield on the 10-year German government bond was slightly less than 0.02 percentage point lower at around 0.83% by midday.

Yields on Spanish and Italian 10-year debt, which some strategists say could be most affected by a Greek default, were higher at around 2.36% and 2.31% respectively.

"From a market perspective the concern is that if Greece was to default and/or exit, then it might encourage others to do the same," said Gary Jenkins, a credit strategist at London-based asset manager LNG Capital. That, he said, "puts the entire eurozone project at risk of collapse."

In the U.S., the S&P 500 was indicated opening 0.3% lower. Future contracts don't always accurately predict moves after the opening bell though.

In Asia, the Nikkei ended Monday marginally lower, marking its fifth loss in the past seven sessions, with strategists also citing tension over unfruitful Greek debt talks as well as fears over the implications of a U.S. interest rate increase in coming months.

Brent crude edged 1.5% lower to around $63.65 a barrel, while gold lost 0.4% to $1,174.60 a troy ounce.

Write to Josie Cox at josie.cox@wsj.com

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