Banks posted the largest losses, but overall volume was unusually weak. The KBW bank index dropped 2.5 per cent, with Bank of New York Mellon down more than four per cent.
The S&P 500 found strong resistance after closing on Friday near its 200-day moving average and close to the top of a trading range the index has held for three months.
Initial relief over the appointment of a technocrat to head the new government in Italy after the resignation of Silvio Berlusconi gave way to worries that unpopular austerity measures will not be enough to fix the country’s finances.
Benchmark yields in Italy, France and Spain edged higher from the end of last week and closed near session highs. Rising bond yields are being watched carefully because every rise in interest rates threatens the ability of Italy and other countries to finance themselves.
“That sign of a reversal of what had been a more favorable trend in Europe is what the [equities] market worried about today,” said Jeff Kleintop, chief market strategist at LPL Financial in Boston.
“That has raised worries that European problems are not that much behind us.”
Stocks have lately focused on headlines from Europe as traders react to the escalating sovereign debt crisis in the Eurozone. Italian benchmark bond yields rose above seven per cent last week, a level that forced countries with a lower debt burden to seek bailouts. With debt of more than €2 trillion, Italy is considered too big to bail out.
Yields on 10-year Italian debt rose to 6.76 per cent yesterday.
The Dow Jones industrial average dropped 74.70 points, or 0.61 per cent, at 12,078.98. The Standard & Poor’s 500 Index fell 12.07 points, or 0.96 per cent, at 1,251.78. The Nasdaq Composite Index lost 21.53 points, or 0.80 per cent, at 2,657.22.
Around 5.5bn shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, the third-lowest number so far this year and down more than 30 per cent from the year’s daily average of just over 8bn.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of 16 to 5. On the Nasdaq, about three stocks fell for every one rising.