The yield on the benchmark Italian government bond spiked above 7 percent, evidence that investors are losing faith in the country’s ability to repay its debt. Greece, Portugal and Ireland required bailouts when their bond yields rose above the same mark. Unlike those countries, Italy’s $2.6 trillion in debt is too large for other European countries to rescue.
In Greece, power-sharing talks fell apart between the country’s two main political parties, raising doubt about whether the country will be able to receive the next installment of emergency loans it needs to avoid default.
Italian Premier Silvio Berlusconi promised late Tuesday to step aside after a new budget is passed, but there are concerns that the transition to a new government will be difficult. Markets see Berlusconi as an impediment to the kind of far-reaching economic reforms Italy needs to remain solvent.
“The market loves a quick solution and we’re obviously not getting one,” said Mark Lehmann, director of equities of JMP Securities.
“We’ve had a strong rally off the bottom and any piece of bad news is going to be responded to negatively.”
The Dow sank 420 points, or 3.5 percent, to 11,743 in midafternoon. If that holds, it would be the largest one-day drop for the Dow since August 4.
The Dow fell 276 on Monday of last week and then 297 points the following day after the Greek prime minister said he would put an unpopular package of austerity cuts to a public vote. That raised the prospect that the measures would fail and Greece would default. The referendum was later scrapped.
The S&P 500 lost 45 points, or 3.6 percent, to 1,230. The S&P is now negative for the year again. The index has alternated between small gains and losses for 2011 since Oct. 26.
The Nasdaq composite slid 103, or 3.7 percent, to 2,624
The slide was broad. Only two stocks in the S&P 500 index rose. Materials and financial companies fell the most. Morgan Stanley fell 8 percent and coal producer Alpha Natural Resources fell 8 percent.
Markets fear that a chaotic default by either Greece or Italy would lead to huge losses for European banks. That, in turn, could cause a global lending freeze that might escalate into another credit crisis similar to the one in 2008 after Lehman Brothers fell.
Some analysts fear that the euro itself could fall, which would lead to inflation and a breakdown in free trade agreements in the European Union.
European markets also fell sharply. Italy’s benchmark index plunged 3.8 percent. Germany’s DAX and France’s CAC-40 each lost 2.2 percent.
The prices of assets seen as safe havens rose sharply. The dollar jumped 1.6 percent versus the euro. The yield on the benchmark 10-year Treasury note fell to 1.97 percent from 2.08 percent late Tuesday, a steep drop.
