U.S. stocks dropped 1 percent on Monday as the effects of Japan's earthquake and tsunami weighed on sentiment on Wall Street, which is likely to experience a high degree of volatility in the near term.

The benchmark Standard & Poor's 500 fell to its lowest in six weeks, following sharp losses overseas. European shares hit their lowest level in three months.

When in doubt, sell, said Charles Lieberman, chief investment officer of Advisers Capital Management, LLC in Hasbrouck Heights, New Jersey.

Because investors are unsure, there is nervousness and the desire for safety, he explained. So some selling is going on just on that basis, he said.

The Chicago Board Options Exchange volatility index <.VIX>, or VIX, jumped 12.5 percent, another sign investors are worried by uncertainty.

Among shares most affected were those in the nuclear industry after explosions and damage at Japanese nuclear plants created doubts about the prospects of the industry.

In addition, shares of luxury goods companies worldwide were hit. Japan accounts for 11 percent of global luxury sales.

A second hydrogen explosion rocked a stricken nuclear power plant in Japan, sending authorities scrambling to avert a meltdown.

General Electric Co , which has combined nuclear ventures with Hitachi Ltd <6501.T>, fell 2.9 percent to $19.77.

The Market Vectors uranium and nuclear energy exchange traded fund slipped 13.8 percent, while the Global X Uranium ETF fell 19.5 percent.

Among U.S. luxury shares, Tiffany dropped 6.1 percent to $59.32.

Insurers with likely exposure to Japan fell. Shares of U.S. insurer Aflac Inc lost 4 percent to $53.34, while AIG lost 1.2 percent to $36.90.

The Dow Jones industrial average <.DJI> was down 128.14 points, or 1.06 percent, at 11,916.26. The Standard & Poor's 500 Index <.SPX> was down 16.16 points, or 1.24 percent, at 1,288.12. The Nasdaq Composite Index <.IXIC> was down 31.83 points, or 1.17 percent, at 2,683.78.

Japanese stocks fell 6.2 percent as investors expected the disaster to take an economic toll.

Japanese ports handling as much as 7 percent of the country's industrial output sustained major damage, disrupting global supply chains and causing billions of dollars in losses, industry officials said.

U.S.-listed shares of Japanese companies also declined. Toyota Motor Co <7203.T>, which said it would suspend production at all its Japanese car plants, fell 6.2 percent to $80.38. The iShares MSCI Japan index exchange traded fund sank 8.8 percent.

(Additional reporting by Edward Krudy; Editing by Kenneth Barry)