The Dow Jones industrial average fell more than 400 points at midday as fears grew that the debt crisis was wreaking havoc on the continent.
After a morning in which traders worried about Italy's ability to deal with its 1.9 trillion euros of debt, the afternoon brought an anxiety-inducing report from Reuters that Germany and France may move ahead with a plan to shrink the number of countries using the euro.
The plan would be an effort to confront the European Union's current inability to deal with the debt crises in Greece and Italy, but some leaders on the continent fear that it would have a destabilizing effect, according to Reuters.
The Dow was recently down 408.01 points, or 3.4%, to 11762.17. The Standard & Poor's 500 index was down 3.6%, or 45.75 points, to 1230.17.
Before the Reuters report came out, leading indexes in Germany and France closed the day down 2.2%.
Just Tuesday, investors took heart from the news that Silvio Berlusconi would step down as Italian prime minister after a long rocky reign. But Wednesday the focus shifted from Berlusconi to the problems that Italy will continue to have, no matter who is leading the country.
Yields on Italian government bonds rose to recent records Wednesday, signaling the distrust that investors have in Italy's ability to repay its debts.
The market yield on 10-year Italian bonds soared to 7.25%, up from 6.77% on Tuesday and the highest since 1997. The yield has surged from 5.93% just two weeks ago.
As investors fled European markets, they poured again into U.S. Treasury bonds, sending the yield on the 10-year Treasury bond below 2%. The dollar gained in value against the euro.
Just a week ago, investors were breathing a sigh of relief as the European Union appeared to develop a package to bail out Greece from its debt crisis. Attention has now swiftly turned to the problems in Italy, which is much larger than Greece. With its 1.9 trillion euros in debt, most analysts say Italy is too big for the European Union to bail out. Without a bailout, Italy could default on its bonds, sending shock waves through the international financial system.
There are also questions about how willing Berlusconi will be to relinquish power, and how smooth any transition will be.
"Berlusconi’s announcement that he would resign once the government votes through economic reforms demanded by the European Union does not appear to have had the desired effect on market sentiment," analysts at Nomura Securities wrote in a note to clients Wednesday morning. "It has become clear that the saga could run well beyond the vote on the 2012 budget law next Tuesday."
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-- Nathaniel Popper
Photo: Getty Images / Spencer Platt
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