A protester holds Greek flags during a demonstration against a new property tax which has been included to the Greece's PPC bill to consumers in Athens.
Even as Greece works towards an agreement with private sector investors to meet their debts, the S&P warned that Greece is likely to enter into default. REUTERS

(REUTERS) -- Stocks tumbled in early trading on Monday as concerns grew about the state of Europe's finances as Greece and Germany sparred over budget measures for Athens.

Bank stocks led the way lower after a report that Germany was pushing for Greece to give up control over its budget policy to European institutions as part of discussions over a second bailout package.

The issues in Greece added to uncertainty surrounding a Monday summit where European Union leaders will sign off on a permanent rescue fund for the euro zone. The leaders are expected to agree on a balanced budget rule in national legislation.

While sentiment has improved over the euro zone lately, with the S&P 500 up 4.7 percent before the start of trade Monday, many investors still view the region with caution as setbacks in solving its sovereign debt issues could hamper international economic growth and erode domestic bank profits. Friday's weaker-than-expected read on U.S. fourth-quarter gross domestic product further underscored those anxieties.

The pace of U.S. growth doesn't justify the returns we've seen so far this month, and the resurgence of issues in Europe is putting the risk-off trade back on the table, said Joshua Brown, vice president of investments at Fusion Analytics in New York.

Lately we've done a good job of shrugging off euro headlines, but I think we're reaching a tipping point.

U.S. consumer spending 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.

The Dow Jones industrial average <.DJI> was down 112.50 points, or 0.89 percent, at 12,547.96. The Standard & Poor's 500 Index <.SPX> was down 14.65 points, or 1.11 percent, at 1,301.68. The Nasdaq Composite Index <.IXIC> was down 28.78 points, or 1.02 percent, at 2,787.77.

U.S.-listed shares of Barclays Plc fell 5 percent to $13.38 and Deutsche Bank sank 5.6 percent to $41.94. European shares were down 1.2 percent while an index of European banks <.SX7P> lost 3.5 percent.

Standard & Poor's late Friday issued negative ratings on three brokerage firms, including Jefferies Group Inc , citing the impact of a prolonged crisis in Europe.

Issues in Europe have taken a backseat to the focus on corporate earnings in recent weeks. By the end of last week, a majority of companies have topped analyst consensus expectations, though by a lower rate than previous quarters.

Gannett Co reported fourth-quarter results that were roughly in line with expectations, but shares fell 6.4 percent to $14.24.

Pep Boys Manny, Moe and Jack soared 23 percent to $14.85 after the company agreed to be bought by Gores Group for $791 million.

Swiss engineering group ABB agreed to buy U.S. electrical components maker Thomas & Betts Corp for $3.9 billion in cash, sending shares of the company up 23 percent to $71.08.

Bank of America Corp is shaking up the leadership of its investment bank as it looks to find its footing in a difficult market environment. The stock fell 3.3 percent.

(Editing by Padraic Cassidy)