Oil fell on fears of slowing demand, including a drop in China’s crude imports, while bond and gold prices jumped.
The concern about Italy, the euro zone’s third-largest economy, prompted an emergency meeting of top European Union officials.
Italian government bonds and stocks dropped as investors cut their exposure amid fears that the country, with the highest sovereign debt ratio relative to GDP in the euro zone after Greece, could be next to get dragged into the crisis.
The news comes amid efforts to help Greece with its debt problems before they affect other countries and banks, especially European ones heavily exposed to Greek debt.
The benchmark 10-year US Treasury note shot up 27/32 in price, pushing its yield down to 2.93 percent on Monday from 3.02 percent late on Friday.
“We are seeing some follow-through buying in Treasuries, and the European situation continues to fester. It is just an environment where there are a lot of factors that are stacking up as bullish for bonds,” said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.
A weaker-than-expected US jobs report on Friday and data showing China’s import growth fell to its slowest pace in 20 months also drove investors away from stocks.
“The dual situations of US debt and Europe are very severe and causing so much uncertainty on a global macroeconomic basis,” said Joseph Cangemi, managing director at BNY ConvergEx Group in New York.
The MSCI world equity index fell 2 percent to a one-week low and the three major US stock indexes dropped more than 1 percent.
At 1812 GMT, the Dow Jones industrial average was down 148.30 points, or 1.17 percent, at 12,508.90. The Standard & Poor’s 500 Index was down 22.74 points, or 1.69 percent, at 1,321.06. The Nasdaq Composite Index was down 54.75 points, or 1.91 percent, at 2,805.06.
The developments in Italy grabbed the spotlight as investors awaited the first of second-quarter earnings from US companies. The earnings period starts after Monday’s closing bell with results from aluminum maker Alcoa
The pan-European FTSEurofirst 300 index of top shares fell 1.5 percent to close at 1,097.60 points, its lowest closing level since June 28, while an index of emerging market stocks lost 1.8 percent.
In the foreign-exchange market, the dollar rose 1.1 percent against a basket of major currencies.
The euro was down 1.7 percent at $1.4025, after earlier hitting a session low at $1.3984, its lowest in six weeks.
“Italy would be a challenge that makes Greece look miniature by comparison,” said Karl Schamotta, senior strategist at Western Union Business Solutions in Calgary.
“We have a wide-ranging contagion issue here — or at least the perception of one — and that’s making people very nervous.”
JP Morgan said Italian banks are vulnerable because of their high reliance on wholesale funding. Moreover, their government bond holdings stand at 6.33 percent of assets, higher than those of Spanish banks.
Oil prices were pressured by the concern about the European debt crisis. Brent crude for August was down $1.27 at $117.06. On the New York Mercantile Exchange, crude for August delivery was down $1.21 at $94.99 a barrel.
Spot gold was up 0.3 percent at $1,547.76 an ounce, after hitting $1,556.59, near a two-month high, earlier in the session.
Data last Friday showed US jobs growth nearly halted in June, adding to concerns about the health of the world’s biggest economy.
