World stocks and oil prices slumped on Thursday on heightening debt contagion fears after Spain's borrowing costs jumped to almost 7 percent at a debt auction - a level seen as unsustainable by many investors.
The euro erased most of its gains and U.S. Treasury debt prices reversed losses as investors, who had initially been encouraged by better-than-expected U.S. economic data, turned increasingly risk averse in the afternoon.
Dragging on sentiment was an apparent lack of progress in a U.S. congressional committee tasked reducing with dealing with the nation's debt problems and a comment from an euro-zone official that there are no plans for any financial assistance program for Italy under the region's bailout fund.
Pretty much everything's for sale. There's a move towards cash, said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore.
The three major Wall Street stock indexes fell sharply, with the Nasdaq closing nearly 2 percent lower.
The Dow Jones industrial average <.DJI> fell 134.79 points, or 1.13 percent, to 11,770.80, while the Standard & Poor's 500 Index <.SPX> declined 20.63 points, or 1.67 percent, to 1,216.28. The Nasdaq Composite Index <.IXIC> finished down 51.62 points, or 1.96 percent, at 2,587.99.
A decline in new claims for U.S. jobless benefit to a seven-month low last week and a rebound in permits for future home construction in October offered new signals that the economy was gaining traction. But the data was not enough to offset the fears out of Europe.
In Europe, the FTSEurofirst 300 <.FTEU3> index slid 1.3 percent to close at 957.85 points after falling to a more than one-month low of 950.94. Banking shares, which have slumped more than 35 percent so far this year due to their huge exposure to euro zone sovereign debt, were among the top decliners.
World stocks, measured by the benchmark MSCI All-Country World index <.MIWD00000PUS>, dropped 1.6 percent.
U.S. crude oil prices fell 3.7 percent, the biggest one-day percentage loss since September 28, to settle at $98.82 per barrel.
The safe-haven dollar rose for a fourth straight session as risk aversion ruled. The euro, however, was practically flat against the dollar at $1.346, having risen as high as $1.35403 on trading platform EBS.
Commodity currencies such as the Australian, Canadian, and New Zealand dollars as well as emerging market units posted sharp losses as investors grew frustrated the two-year-old debt crisis is far from being resolved.
I think this euro zone crisis could worsen before it gets better, said James Keegan, chief executive officer and chief investment officer at Seix Investment Advisors, in Upper Saddle River, New Jersey.
In his maiden speech to Congress, Italian Prime Minister Mario Monti outlined a broad raft of policy priorities, including pension and labour market reform, a crackdown on tax evasion and changes to the tax system.
But his speech failed to quell worries about the future of the euro zone, and a rise in Spain's borrowing costs to nearly 7 percent at an auction fuelled investors' anxiety.
Yields paid on 10-year Italian bonds were at 6.9 percent after reaching 7.259 percent earlier in the session. Spanish 10-year bonds were paying 6.5 percent.
The benchmark 10-year U.S. Treasury note erased early losses to gain 11/32 in price, with the yield at 1.960 percent.
(Reporting and writing by Walter Brandimarte; Additional reporting by Chuck Mikolajczak and Caroline Valetkevitch; Editing by Leslie Adler)