Stocks and the euro slid on Monday on worries Greek and Portuguese debt loads could weigh on regional and global growth, although hopes the U.S. economy could decouple from European woes helped U.S. equities close off the day's lows.
A rise in the yield on Portuguese government bonds to more than 17 percent, the highest level since the launch of the euro, sparked fears that Lisbon will follow in Greece's footsteps and require a second bailout.
A European Union summit on Monday that was to focus on reviving growth and creating jobs failed to deliver the hoped-for message of optimism as Greece and its private bondholders continued to struggle to reach a restructuring deal.
Until this deal is actually done, there are going to be concerns. The longer it takes there is more suspicion that there is something wrong, said Michael Yoshikami, chief investment strategist at YCMNet Advisors in Walnut Creek, California. They've been saying they're on the verge of a deal for a long time.
Greece must reach a debt swap deal with its private creditors in order to secure its second bailout package, which Athens needs to meet a 14.5 billion euro repayment on its debt due in mid-March. Otherwise Greece faces a messy default and, some say, a potential euro-zone exit.
The spread between Portuguese and German 10-year government bond yields widened past 1,500 basis points for the first time in the euro era on Monday, and the cost of insuring Portuguese debt against default also hit fresh peaks.
The euro plunged against the dollar, surrendering an early six-week high, and dropped to a 4-1/2-month low versus the safe-haven Swiss franc.
After so many disappointments and debate on the Greek issue, the market is expecting very little to be agreed to in the short term, said Michael Woolfolk, a senior currency strategist at BNY Mellon in New York.
The single currency was last down 0.75 percent at $1.3125, according to Reuters data.
Against the Swiss franc, the euro fell to a 4-1/2-month low of 1.2034 francs before recovering to trade at 1.2050 francs, according to Reuters data.
In the United States, the Dow Jones industrial average dropped 6.74 points, or 0.05 percent, to 12,653.72. The Standard & Poor's 500 Index dropped 3.31 points, or 0.25 percent, to 1,313.02. The Nasdaq Composite Index dropped 4.61 points, or 0.16 percent, to 2,811.94.
Nevertheless, stocks closed off the day's lows on hopes U.S. markets can decouple from Europe's troubles, with money managers, some of whom missed the upward move, buying on dips.
European shares closed at a two-week low as banks bore the brunt of the sell-off.
The FTSEurofirst 300 index of top European shares ended down 1 percent at 1,030.43, the lowest close since mid-January, after a six-month high last week.
The STOXX Europe 600 banking index fell 3.1 percent, with French banks the worst hit after President Nicolas Sarkozy's restated plan for a financial transaction tax, with an August target date, heated up the debate on more stringent legislation in the country.
Societe Generale, BNP Paribas and Credit Agricole dropped 6.5 to 7.1 percent.
The MSCI world equity index was down 0.58 percent at 315.86 after it weakened in Asian trade after markets reopened following the long Lunar New Year holidays. The benchmark index hit its highest level since August last week after the U.S. Federal Reserve pledged to keep interest rates near zero for the next three years.
U.S. and European data did little to boost investor confidence.
Consumer spending in the United States was flat in December as households took advantage of the largest rise in income in nine months to boost their savings, setting the tone for a slowdown in demand early in 2012.
While business confidence in the euro zone strengthened in January for the first time since early 2011, analysts said the data masked a growing gap in performance between Germany and the rest of Europe.
We expect the recession in the euro zone will end in the spring, said Christoph Weil, an economist at Commerzbank. But we can also see that the divergence in the euro zone is increasing and that is of great concern.
Brent crude oil futures extended losses in volatile trading as supply disruption fears eased after the Iranian parliament postponed a debate about halting crude exports to the European Union. In London, ICE Brent crude for March delivery settled at $110.75 a barrel, dropping 71 cents.
In New York, U.S. March crude fell 78 cents to settle at $98.78 a barrel, after trading from $98.43 to $100.05.
Gold hit a high of $1,739 an ounce at one point, its highest since December 8, but then edged down to $1,728.55 an ounce. Analysts said they expected gold to recover from Monday's bout of weakness, especially given the impasse over the restructuring of Greece's debt burden.
(Additional reporting by Rodrigo Campos and Nick Olivari in New York and Richard Hubbard in London; Editing by Leslie Adler and Dan Grebler)