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US stocks plunge on European debt worries

NEW YORK CITY — Stocks plunged Monday after warnings about the finances of several European countries stoked fears that the region’s debt crisis is worsening. The euro dipped briefly to its lowest level against the dollar in two months.

The Dow Jones industrial average fell 160 points, or 1.3 percent, to 12,352 in morning trading. Stocks also fell broadly in Europe and Asia.

The Standard & Poor’s 500 index fell 18, or 1.3 percent, to 1,315. Nasdaq composite index fell 51, or 1.8 percent, to 2,751.

Italy is the latest European country to be affected by the region’s widespread debt problems. Standard & Poor’s said Saturday that country was in danger of having its debt rating lowered if it could not reduce its public borrowing and improve economic growth.

The ratings agency lowered its outlook for Italy’s debt to negative from stable. That means there is a one-in-three chance that S&P would downgrade Italy’s debt rating in the next two years.

Fitch and Moody’s, the other two main ratings agencies, have said they see no reason to alter their outlook for Italy’s debt. The S&P warning was enough to rattle European markets and cause investors to worry that Italy could be next on the list of countries affected by widespread European debt after Greece, Portugal and Ireland.

Financial markets fell sharply in midday trading in Europe. The FTSE 100 index of leading British shares fell 1.5 percent. Germany’s DAX lost 1.7 percent. The CAC-40 in France was 2 percent lower.

Spain’s public finances are also worrying investors. Spain’s ruling Socialist party was roundly defeated in local elections, raising concerns that political instability would keep that country from enforcing spending cuts. The Ibex 35 index on the Madrid stock market fell nearly 2 percent in midday trading.

The 10-year U.S. Treasury yield fell to 3.10 percent, its lowest level this year. Bond yields fall when prices go up, so the drop is a sign that investors are clamoring for the safety of long-term U.S. debt.

With little economic news coming out of the United States, Wall Street’s focus is on Europe.

Concerns about the ability of the Spanish and Italian governments to control their debt come after a Friday debt downgrade for Greece that gave investors more reason to fear that country would need more help managing its debts following a $157 billion loan package it received last year.

The European Union’s top financial official urged Greece on Monday to sell more of the country’s holdings to give the market more faith that it is getting its debt under control.

Downgrades of European sovereign debt can shock world markets initially. Moody’s downgraded Spain’s on March 10. The Ibex 35 sank 1.3 percent on the news, but recovered its losses within days.

S&P downgraded their debt outlook for the U.S. on April 17 from stable to negative, saying it could lower the country’s debt rating in the future. The warning blindsided markets, sending the Dow down 240 points in the morning. But it recovered the next day.

Later this week, investors will get more U.S. economic data. The Commerce Department will report Tuesday on the number of new homes that were sold in April, helping investors gauge the state of the housing recession.

On Thursday, the Commerce Department will release its revised estimate for how much the economy grew in the first quarter. The GDP number is expected to be revised upward from its initial 1.8 percent. Investors will be watching to see how much the rising cost of oil and raw materials has hampered spending by corporations and consumers.

On Friday, the Commerce Department’s report on personal income and spending in April will help investors gauge how much a more expensive tank of gas has affected how much families spend on other things.