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European debt crisis sends U.S. stocks tumbling

NEW YORK — Trouble on two fronts in the European debt crisis sent American stocks tumbling Wednesday to their biggest loss since the rocky trading of the summer. The Dow Jones industrial average fell almost 390 points.

Stocks were down from the opening bell after borrowing costs in Italy spiked to dangerous levels, a sign that investors are losing faith in Italy’s ability to repay its national debt.

“Italy is potentially too big to bail out, but that’s the problem,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “It’s spiraling out, and the question is now, how do you fix it?”

In Greece, meanwhile, power-sharing talks aimed at avoiding a default broke down in chaos.

The Italian economy is more than six times larger than that of Greece, which so far has been the center of the continent’s debt problem. American investors are worried that the consequences from Europe could include a freeze in lending, the disintegration of the euro currency or a bruising recession that would hurt the U.S.

They sold stocks as a result. The Dow finished down 389.24 points, at 11,780.94.

“The market loves a quick solution, and we’re obviously not getting one,” said Mark Lehmann, director of equities of JMP Securities.

The slide in stocks was broad: Only a single stock in the Standard & Poor’s 500, Best Buy, finished higher for the day. Financial companies were among the hardest hit because they would suffer first if Europe’s debt problem spins out of control.

Morgan Stanley stock plunged 8 percent and Goldman Sachs 7 percent. In regulatory filings last week, Morgan Stanley reported it had $1.8 billion in liabilities related to Italy, and Goldman said it had $28 billion related to all of Europe.

Markets fear that a chaotic default by Greece would lead to huge losses for European banks. That could cause a global lending freeze similar to what happened after the investment house Lehman Brothers fell in 2008.

In Italy, where the crisis is only beginning, the country’s borrowing rate has skyrocketed to a level that is widely considered to be unsustainable. The higher rates will make it far more difficult and expensive for Italy to roll over its debts. It has more than $400 billion to raise in 2012 alone. Italy’s total economy is about $2 trillion.

The 389-point decline for the Dow was the worst since Sept. 22. The S&P 500 closed down 46.82 points at 1,229.10. The S&P, the broadest major stock index, declined 3.7 percent, its worst day since Aug. 18.

Over the summer, swings of 3 or 4 percent a day for the stock market were common. Investors were focused on a debt showdown in Washington and fear of a second recession.

Lately, Europe has pushed everything else to the back burner, and the volatility has continued. Last week, the Dow fell 276 points Monday and 297 points Tuesday, both because of instability in Europe. It rose 100 or more three of the next five days.

The Nasdaq composite index finished Wednesday down 105.84, or 3.9 percent, at 2,621.65.

European stock markets fell sharply, too. The main stock index in Italy finished the day down 3.8 percent. The DAX index in Germany and the CAC-40 in France each declined 2.2 percent.

In the United States, prices rose for assets seen by investors as reasonably safe. The dollar rose 1.6 percent against the euro, a reflection of the instability in the 17 nations that use the euro.

The yield on the 10-year Treasury note fell to 1.96 percent from 2.08 percent Tuesday, a steep drop. Falling Treasury yields are a sign of rising bond prices, both indications that investors feel safe buying American debt.