NEW YORK (AP) — Fear that Spain may need a bailout sent its borrowing costs soaring, the euro to a two-year low against the dollar and stocks around the world tumbling as investors pulled back Monday from all manner of risk.
The Dow Jones industrial average, after falling 239 points earlier in the day, was down 127 to 12,696 shortly after 3 p.m. EST. Yields for U.S. government bonds sank to record lows as traders sought the safety of American debt.
Borrowing costs rose sharply for Spain and Italy after news the Spanish economy contracted by a quarterly rate of 0.4 percent in the second quarter. Falling economic output makes it more difficult for Spain to deal with its debts.
The Standard & Poor's 500 index fell 15 points to 1,348. The Nasdaq composite index dropped 40 points to 2,886.
"Increases in Spanish borrowing costs have brought back questions about the health of Europe," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "That's driven a flight to safety."
The selling was widespread. All 10 industry groups within the S&P 500 were down, with energy companies off nearly 1.5 percent.
In addition to Spain, investors are worried that Greece might get cut off from emergency loans it needs to avoid default. On Tuesday, inspectors from its international creditors arrive in the country to check on its progress in cutting its budget and in meeting other conditions it had agreed to in exchange for aid.
The Greek government has repeatedly failed to hit targets required for the two bailouts it has received.
Adding to the jitters, a Chinese central bank adviser forecast that China's economic growth could slow from its second-quarter rate of 7.6 percent rate, which itself was the slowest pace in three years. Investors had hoped that the world's second-largest economy would compensate for slowdowns in the U.S. and Europe but now aren't so sure.
"I wish it were still the weekend," said Lawrence Creatura, a portfolio manager at Federated Investors, a mutual fund firm. "People were initially worried just about the Europe but now its spread to China and beyond."
In Spain, the yield on its benchmark 10-year bond rose to 7.43 percent, the highest since the euro was launched in 1999 and a level considered unsustainable for more than a few months. Spanish banks have already received international aid. Now investors fear it's the government's turn.
The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what's available in existing emergency funds
The fear ratcheted up over the weekend when a southern region of Spain announced that it might need a financial lifeline from the government in Madrid to make ends meet. That followed news last week that an eastern region of the country had asked for help.
In a move that recalled the global financial crisis four years ago, Spain's market regulator on Monday said it was temporarily banning short-selling of shares on its stock indexes. In a short sale, an investor seeks a profit by betting that the price of a certain stock will fall.
The U.S. briefly banned short selling of dozens of stocks in 2008 as prices were tumbling.
Strong selling rattled European markets. The main stock index dropped more than 7 percent in Greece, 1 percent in Spain, 3 percent in Germany and France. Asian stocks were also sharply lower.
Bank stocks, which tend to take a hit when fear flares in Europe, were among the biggest losers. Citigroup stock dropped 2.6 percent.
The price of oil fell 3.6 percent to less than $90 per barrel. Exxon Mobil declined $1.02, or 1.2 percent, to $84.93.
The euro slipped just below $1.21 against the dollar, its lowest since June 2010.
There were also signs that a global economic slowdown is hitting U.S. companies that rode out the recession fairly well, largely because currencies overseas have tumbled against the dollar.
While global sales at McDonald's restaurants open at least a year rose 3.7 percent, profits slid by about the same rate due to currency exchange. McDonald's generates about two-thirds of its revenue outside the U.S.
"A disproportionately large amount of revenue overseas is seen as a negative today," said Creatura of Federated Investors. "The list of weakening overseas markets is getting longer by the day."
Stock in the world's largest hamburger chain slid 2.5 percent after the company fell short of most Wall Street expectations for both net income and revenue.
Hasbro is also getting hurt by the dollar. If not for the surge in its value, its international revenue in the second quarter would have risen 5 percent, instead of falling 4 percent, the toy maker said Monday. Still, the company beat analyst estimates of net income, thanks partly to cost cutting.
Stock of the Hasbro, whose products include Monopoly and Scrabble, rose $1.43, or 4.2 percent, to $35.27.
Another winner Tuesday was RailAmerica Inc., a short-line railroad operator. It rose 10 percent to $27.29 after announcing that it had agreed to be bought by another short-line operator, Genesee & Wyoming, for $1.39 billion in cash.
AP Business Writer Matthew Craft contributed to this report.