Traders fearful of a rupture in Europe's financial system retreated Wednesday from risky investments. They punished stocks and fled to the safety of U.S. bonds, pushing the yield on the benchmark 10-year Treasury note to a record low.
Major U.S. stock indexes added to earlier losses in afternoon trading, falling 1.5 percent. The Dow Jones industrial average plunged 167 points, one of its worst performances of the year, to 12,413.
European stocks had lost even more, and the euro dropped to a nearly two-year low against the dollar. Borrowing rates for Italy and Spain, both of which are seen as the next problem cases in Europe's debt drama, rose sharply as traders dumped bonds issued by those governments.
Rising demand for low-risk, easily tradable securities pushed the yield on the 10-year Treasury note to 1.64 percent from 1.74 percent late Tuesday. Yields on German government bonds, also seen as safe, turned lower.
Concerns about Europe seemed to lurk around every corner: the European Commission said consumer confidence fell sharply across the region last month. Spaniards withdrew money from their banks, spreading fear about that nation's ability to go on without bailouts. Spain's main stock index fell two percent.
An opinion poll in Greece showed that the far-left Syriza party is gaining support ahead of key elections. Syriza opposes the system of bailouts and sharp budget cuts that have kept Greece afloat but also punished its economy. If the party wins, Greece may be forced to exit the euro currency. The shockwaves could topple nations that have received bailouts, like Portugal, and those that might need them, like Italy.
Amid the tumult, Europe's executive branch called on the 17 nations that use the currency to create a "banking union" that can centrally oversee and — if needed — bail out the sector.
If Europe's financial crisis plunges it into a deep recession, global economic growth will likely falter, reducing demand for commodities and machines that power growth. Fearing that outcome, traders pushed heavy equipment maker Caterpillar and aluminum company Alcoa to the biggest declines among the 30 companies that make up the Dow.
The euro fell as low as $1.2387, the lowest since the summer of 2010. Benchmark stock indexes closed down 2.7 percent in Spain, 2.2 percent in Italy and 2.4 percent in France.
The Dow has had a miserable May. It's down 5.9 percent for the month, putting it on track this week to end its first losing month since September.
The Standard & Poor's 500 index lost 19 to 1,313. The Nasdaq composite average slid 41 to 2,829.
Metals, food and energy commodities all fell sharply. Crude oil lost nearly $3 to below $88 a barrel. Crude has been falling steadily since the beginning of May, when it traded as high as $106 a barrel.
Spain's borrowing costs soared to the highest level since the country joined the euro. Traders are worried that Spain won't be able to navigate the real estate crash that forced it to bail out one of its biggest lenders, Bankia.
The yield on Spain's 10-year bonds, a key indicator of market confidence in a country's ability to pay down its debt, shot as high as 6.69 percent, matching the level it hit at the height of the euro crisis late last year.
Agricultural giant Monsanto was one of the few big gainers in a sea of red. The stock jumped 2 percent after the company's CEO told investors that earnings will likely surge 25 percent this year, far more than Wall Street had been expecting. Sales were strong in its seed and chemicals business, including Roundup herbicides.
BlackBerry maker Research in Motion plunged 7 percent after the company said late Tuesday it had hired a team of bankers to help it weigh its options — Wall Street jargon for a possible sale or reorganization. RIM's business has been crumbling as smartphone users move to iPhone and Android devices.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.