Global equity markets and the euro slid on Wednesday, with U.S. stocks staging a late-day sell-off on a U.S. bank warning, amid growing doubts governments in Europe can contain the euro zone debt crisis.
The euro fell for a third straight session against the dollar to hit a five-week low as rising French and Italian borrowing costs heightened concerns about contagion from the two-year-old debt crisis.
The European Central Bank's purchase of Italian and Spanish bonds brought only temporary relief early in the session. Once intervention stopped, yields resumed climbing as investors doubted how much the ECB can buy to support the bond market.
Higher borrowing costs added to fears Europe would be dragged into a recession, one that would reach beyond the continent.
Fitch ratings warned that unless the debt crisis is resolved in an orderly manner soon, the credit outlook for U.S. banks could worsen. While the outlook is stable, risks of a negative shock are rising and could alter its outlook, Fitch said.
With the crisis escalating in Europe, people think the U.S. will be back in the dumps in three months from European contagion, said Cary Leahey, managing director and senior economist at Decision Economics.
The euro slid 0.51 percent to $1.3462.
Wall Street attempted a rebound, briefly turning positive before moving sharply lower in late trade on the Fitch report.
The Dow Jones industrial average <.DJI> closed down 190.57 points, or 1.58 percent, at 11,905.59. The Standard & Poor's 500 Index <.SPX> was down 20.90 points, or 1.66 percent, at 1,236.91. The Nasdaq Composite Index <.IXIC> was down 46.59 points, or 1.73 percent, at 2,639.61.
The market shrugged off data showing U.S. consumer prices fell last month for the first time in four months as Americans paid less for new cars and gasoline. But prices outside of food and energy posted a slight increase, the Labour Department said.
The U.S. Dollar Index <.DXY>, a basket of major trading-partner currencies, was up 0.5 percent at 78.27.
French borrowing costs rose, with the yield premium of the French 10-year government bond over German Bunds rising to a euro-era high near 2 percent.
France has become the latest target of investor unease as a solution to the region's two-year debt crisis remains elusive. Contagion from the crisis has spread to other top-rated sovereign issuers such as the Netherlands and Austria.
Markets are slowly losing their will to believe in an EU solution and this is being reflected in the debt market, said Paul Bregg, a currency trader at Western Union Business Solutions in Denver, Colorado.
Some European stock markets rebounded to close slightly higher on Mario Monti's move to form a new technocrat government in Italy and a pledge by Greece's LAOS party to give unconditional support to the new Greek prime minister.
The FTSEurofirst 300 index <.FTEU3> of top European shares edged 0.04 percent higher to end at 970.60.
U.S. Treasuries prices rose as stock market losses and fear Europe's debt crisis would widen fed a bid for safe-haven U.S. government debt.
The benchmark 10-year U.S. Treasury note was up 13/32 in price to yield 2.0 percent.
Brent crude in London fell on worries the debt crisis will slow economic growth.
There's a focus on sovereign debt yields; they are still a concern and they are driving prices, said Olivier Jakob at Petromatrix in Zug, Switzerland.
Brent crude for January delivery settled down 30 cents at $111.88 a barrel.
But U.S. crude futures rose above $102 a barrel on news that owners of the Seaway pipeline plan in 2012 to reverse the flow of oil, a move that would relieve an oil glut in Cushing, Oklahoma, the delivery point for New York futures contracts.
U.S. January crude settled up $3.22 at $102.59, which sent the trans-atlantic arbitrage tumbling to $9.28.
Gold fell, pressured by easing U.S. consumer prices and uncertainty after a clash between France and Germany over whether the European Central Bank should do more to stem the region's debt crisis.
U.S. gold futures for December delivery settled down $7.90 at $1,774.30 an ounce.
(Reporting by Wanfeng Zhou, Ellen Freilich, Nick Olivari, Caroline Valetkevitch, Rodrigo Campos and Frank Tang in New York; Writing by Herbert Lash; Editing by James Dalgleish and Dan Grebler)