Global stocks and the euro slid on Monday as investors soured on a European Union plan adopted last week to enhance fiscal discipline in the euro zone in the hopes of quelling a two-year-old debt crisis.
Initial market enthusiasm over the plan on Friday faded due to legal uncertainty surrounding the pact and the absence of a sufficiently strong financial backstop for the euro zone single currency.
Ratings agency Standard & Poor's put more pressure on investor sentiment after its chief economist said time was running out for the euro zone to resolve its debt problems and that it might need another financial shock to get it moving.
Fitch Ratings warned that the meeting of EU leaders last week did little to ease pressure on the region's sovereign debt crisis and the rating agency predicted a significant economic downturn across the region.
The measures were quite positive but the market was looking for a magic bullet and that hasn't happened, said Erik Esselink, fund manager at Invesco Perpetual, which has 5 billion euros under management.
The euro fell 1.5 percent to $1.3189 and borrowing costs for Italy and Spain rose as the EU plan failed to restore market confidence.
Italian 10-year yields threatened to hit the 7 percent level, seen as unsustainable, but peaked at more than 6.8 percent. European Central Bank intervention helped yields fall back to 6.60 percent -- still 20 basis points higher on the day.
Investors rushed to the safety of U.S. government debt. The price of the benchmark 10-year U.S. Treasury note was up 12/32, pushing its yield down to 2.02 percent.
The pact that was agreed upon by European officials still has a long way to go in order to come to fruition, and that leaves the market open to riot, said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
Global stocks as measured by MSCI's all-country world index fell 1.6 percent. The FTSEurofirst 300 index of top regional shares in Europe closed down 1.9 percent at 967.49.
Wall Street pared some losses after falling almost 2 percent in a broad decline, with all l0 Standard & Poor's industry groups in negative territory.
The Dow Jones industrial average <.DJI> closed down 162.87 points, or 1.34 percent, at 12,021.39. The Standard & Poor's 500 Index <.SPX> was down 18.72 points, or 1.49 percent, at 1,236.47. The Nasdaq Composite Index was down 34.59 points, or 1.31 percent, at 2,612.26
Brent crude slipped to almost $107 per barrel on concerns the European debt crisis will slow economic growth and result in reduced oil demand.
Brent crude for January delivery fell $1.36 to settle at $107.26 a barrel.
U.S. January crude fell $1.64 to settle at $97.77 a barrel.
The austerity measures will have a profoundly negative impact on economic growth and will make 2012 a very challenging year in economic terms, said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
U.S. gold futures for February delivery settled down $48.60 at $1,668.20 an ounce.
(Reporting by Steven C. Johnson, Frank Tang and Nick Olivari; Writing by Herbert Lash; Editing by James Dalgleish and Dan Grebler)