U.S. stocks dropped on Monday after ratings agency Standard & Poor's cut its long-term outlook on the United States and another step by China to stem growth reignited worries about the global economy.

S&P downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

It is not good news, and it is not good news because to move toward austerity when the U.S. economy is not on sound footing is not a good idea, said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

This is going to put pressure on policy makers -- Democrats and Republicans alike -- to get their act together. And I'm not sure the timing of getting their act together is that good.

The Dow Jones industrial average <.DJI> dropped 177.02 points, or 1.43 percent, to 12,164.81. The Standard & Poor's 500 Index <.SPX> lost 17.94 points, or 1.36 percent, to 1,301.74. The Nasdaq Composite Index <.IXIC> fell 40.77 points, or 1.47 percent, to 2,723.88.

The CBOE volatility index <.VIX>, better known as Wall Street's fear gauge, surged nearly 20 percent, its largest percentage jump since March 16.

The move by the ratings agency came after China's decision to raise banks' required reserves for the fourth time this year on Sunday, stepping up efforts to fight high inflation.

The move by China hurt commodities, sending copper prices lower. Miner Freeport-McMoran Copper & Gold Inc fell 0.6 percent to $50.85.

Further adding to global concerns, Athens reiterated it has no plans to restructure its government debt, a move its central bank chief said would be catastrophic, but markets speculated that some form of debt rescheduling was likely.

Citigroup Inc's stock advanced 0.2 percent to $4.43 after first-quarter profit fell 32 percent. Citi's bond trading revenue plunged and operating expenses jumped.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)