Surge in investor worries over Europe sends markets down

Fearing a financial rupture in Europe, investors around the world fled from risk Wednesday. They punished stocks and the euro, and the yield on a benchmark U.S. bond hit its lowest point since World War II.

In the U.S., where concerns about Europe have already wiped out most of this year’s gains for stocks, major averages fell more than 1%.

The Dow Jones industrial average lost 160.83 points, or 1.3%, to 12,419.86. The Dow has had a miserable May, losing 6%, and is on track for its first losing month since September.

The Standard & Poor’s 500 lost 19.10 points, or 1.4%, to 1313.32. The Nasdaq composite fell 33.63 points, or 1.2%, to 2837.36. Energy stocks were hit hardest because of a big drop in the price of oil, but stocks in all major industries fell.

With Spain’s banking system teetering and Greece’s political future unclear ahead of crucial elections next month, European stocks lost even more. The euro dropped below $1.24, to its lowest point since the summer of 2010.

“Everyone’s just afraid that if Europe doesn’t get its act together, there will be a big spillover in the U.S.,” says Peter Tchir, manager of hedge fund TF Market Advisors. Uncertainty over Europe’s future was reminiscent of the financial crisis in the fall of 2008, he says, when it was briefly unclear if banks would be bailed out, and “we had these giant swings up and down.”

The trigger for Wednesday’s sell-off was Spain, where the banking system is under strain a week after its fourth-largest bank required $23.8 billion in government aid to cover souring real estate loans. Investors are increasingly worried that problems at the bank, Bankia, might spread to other Spanish banks. Many lent heavily during the nation’s real estate bubble. Losses from the real estate crash might be too big for Spain’s government to shoulder.

On Wednesday, borrowing rates rose sharply for Spain and Italy, which are seen as the next problem cases in a debt crisis that has rocked global markets for more than two years. The yield on Spain’s 10-year bonds, a key indicator of market confidence in the country’s ability to pay down its debt, shot as high as 6.69%, the highest since the euro was launched in 2002.

Intense demand for low-risk securities led investors to buy U.S. government debt. The yield on the 10-year Treasury note plunged to 1.62% from 1.74% late Tuesday.