Stocks dropped more than 2 percent in early trading on Wednesday as a spike in Italian bond yields prompted fears the region's debt crisis was spiraling.
Italian bond yields shot up to 7.502 percent, a new high since the euro was introduced in 1999, as investors dumped the debt after a clearing house increased margin calls. Prime Minister Silvio Berlusconi's promise to resign failed to persuade markets that the country will be able to deliver on economic reforms.
Italy has replaced Greece at the center of the euro zone debt crisis and is seen teetering on the cusp of requiring a bailout.
Portugal and Ireland were forced to seek bailouts when their borrowing costs reached similar levels.
You have this fear of default which is clearly driving up bond yields. This sparks the need to enforce austerity, at least some people believe, said Joseph Tanious, market strategist at J.P. Morgan Funds in New York.
That only creates a fiscal drag and pushes these European economies, which are already on the brink of a recession, deeper into the hole, and that only exacerbates the issue and creates this negative feedback loop.
The Dow Jones industrial average slid 278.59 points, or 2.29 percent, at 11,891.59. The Standard & Poor's 500 Index dropped 32.02 points, or 2.51 percent, at 1,243.90. The Nasdaq Composite Index was off 70.16 points, or 2.57 percent, at 2,657.33.
Financial stocks were off on concerns about U.S. banks' exposure to European debt. Morgan Stanley fell 6.6 percent to $16.17 and Goldman Sachs dipped 4.8 percent to $103.33. The KBW Capital Markets index lost 4.2 percent.
Adding to worries about the region, a plan for a former European Central Bank official to lead a new Greek government ran into trouble as the nation sought to head off a feared bankruptcy.
General Motors Co slid 9.5 percent to $22.67 after the automaker said it would not break even for the year in Europe, as it hoped, due to deteriorating conditions in the region.
(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)