Stocks fell the most in nearly three months on Tuesday with the Dow tumbling more than 200 points as recent government data rekindled concerns about global growth and a deadline loomed for private holders of Greek debt to agree to hefty losses.
Volatility soared, with the CBOE Volatility Index or VIX <.VIX> on track to close above its 50-day average for the first time since November. More than a dozen stocks fell for every rising issue on the New York Stock Exchange, with bank and miner shares among the top decliners.
The recent gains in equities have been supported in part by expectations that Europe's credit crisis will be contained and China's economy will avoid a hard landing. Recent data seems to partly undermine those assumptions.
The concern in the market is the realization that China is affected by Europe as much as anyone else is, said Art Hogan, managing director of Lazard Capital Markets in New York.
Europe's downturn appeared ready to turn into a full-fledged recession due to a collapse in household spending, exports and manufacturing in the final months of 2011, the European Union said.
Brazil's gross domestic product expanded by a meager 2.7 percent in 2011, data showed Tuesday, adding to concerns after China cut its growth outlook earlier in the week. Expected growth in emerging markets has been a main catalyst for equities' gains.
The Dow Jones industrial average <.DJI> lost 204.57 points, or 1.58 percent, to 12,758.24. The S&P 500 Index <.INX> dropped 21.66 points, or 1.59 percent, to 1,342.67. The Nasdaq Composite <.IXIC> fell 43.27 points, or 1.47 percent, to 2,907.21.
Despite the decline, the S&P 500 is still up 7 percent for the year. If fourth-quarter gains are included, the benchmark index is still up almost 20 percent since September 30. Analysts have expected a pullback for weeks, citing an overstretched market.
A group representing bondholders warned a default could cause more than 1 trillion euros ($1.3 trillion) of damage to the region. Creditors have until Thursday night to accept a bond swap in which they would lose almost three-quarters of the value of their bonds.
If there is not enough participation in that part of the deal, what we have can fall apart, Lazard's Hogan said.
As part of a reassessment of possible collateral damage if the Greek deal with private debt holders collapses, traders sold the stocks of large banks on concern about their exposure to Greece.
The S&P financial sector index <.GSPF> dropped 2.4 percent and the KBW bank index <.BKX> fell 2.7 percent. Morgan Stanley
A gauge of European bank shares <.SX7P> tumbled 4.2 percent.
Greece has no plans to extend the deadline on its bond-swap offer to private creditors, officials said, dismissing market rumors that the date may be changed to increase participation in the offer.
Basic materials stocks were also hurt as commodity prices fell, pressured further by a stronger U.S. dollar.
Aluminum producer Alcoa Inc
The CRB commodities index <.CRB> fell 1.4 percent, down for a third straight session.
(Reporting by Rodrigo Campos; Editing by Jan Paschal)