After three days of bad news about Europe's debt crisis sent Asian and European markets down Monday, it was Wall Street's turn.
The Dow Jones industrial average fell as many as 180 points before paring back some of its losses. Another steep downgrade of Greece's credit rating, a warning on Italy's debt and a major defeat of Spain's ruling party caused new worries about Europe's debt crisis.
That sent the euro lower against the dollar. A stronger dollar makes it more expensive for other countries to buy U.S. exports, hurting U.S. companies that sell goods abroad. Fears that Europe's debt troubles could escalate, as they did last year when Greece melted down, sent stocks tumbling across the globe.
The dollar rose 0.6 percent against an index of global currencies Monday. The euro dipped briefly to its lowest level against the dollar in two months.
The bad news began late Friday, when the Fitch ratings agency downgraded Greece's debt further into junk status. That gave investors more reason to fear that the country will need more help managing its debts beyond the emergency loan package it received last year.
Then Standard & Poor's said Saturday that Italy was in danger of having its debt rating lowered if it could not reduce its borrowing and improve economic growth. The next day, Spain's ruling Socialist party was roundly defeated in local elections, potentially jeopardizing the country's deficit-cutting program.
The Dow fell 130.78 points, or 1.1 percent, to close at 12,381.26. The Standard & Poor's 500 index fell 15.9, or 1.2 percent, to 1,317.37 All but a handful of stocks in the S&P 500 fell. The Nasdaq composite index fell 44.42, or 1.6 percent, to 2,758.9.
European markets also closed sharply lower. The FTSE 100 index of leading British shares fell 1.9 percent. Germany's DAX lost 2 percent. The CAC-40 in France was 2 percent lower.
While stocks are reacting strongly to the weekend's headlines, investors are not selling corporate bonds. If they were, it would signal that investors were growing wary of risk, said Jack Ablin, chief investment officer at Harris Private Bank.
"There's a short-term perception of risk, but I'm not viewing it as necessarily lasting," said Ablin.
Still, as investors sought safer assets, the yield on the 10-year Treasury note went as low as 3.10 percent, its lowest level of the year. The yield moved back up to 3.13 percent in afternoon trading, slightly below the 3.15 percent it traded at late Friday. Bond yields fall when their prices rise.
Some analysts think a downturn in stocks was overdue. Markets have wobbled over the past few weeks, but the Dow is still up 7 percent this year. The index has shrugged off revolutions in the Arab world, attempts by China and other emerging markets to slow growth and the nuclear crisis in Japan. Now that the U.S. corporate earnings season is over, global news has become the focus.
"There's not a lot of good news," said Randy Bateman, president of Huntington Asset Advisors. "Investors needed an excuse to pull back."
Downgrades of sovereign debt can shock world markets when they're first announced. Recently, debt downgrades have had a short-term effect. Moody's downgraded Spain's debt on March 10. The Ibex 35 sank 1.3 percent on the news, but recovered its losses within days.
S&P downgraded its debt outlook for the U.S. on April 17 from stable to negative, meaning it could lower the country's debt rating in the future. The warning sent the Dow down 240 points in morning trading, but it recovered the next day.
Four stocks fell for each one that rose on the New York Stock Exchange. Volume was 3.4 billion shares.