World stocks, euro fall, bonds gain on Italy concerns

Global stocks and the euro sank as fears that Italy could become the latest country caught up in the euro-zone debt crisis caused investors to sell risky assets and snap up safe-haven US Treasury debt, pushing the 10-year note's yield below 3 percent.

The problems in Italy, which has the highest sovereign debt ratio relative to GDP in the euro zone after Greece, come amid efforts to help Greece with its debt problems. 

Investors fear the crisis will keep spreading and eventually affect the global economy, particularly the banks exposed to the debt.

"A default by Greece would be enough to set off a widespread sell-off in the financial market but a default by Italy would be worse than Lehman," said Kathy Lien, director of currency research at GFT Forex in New York. 

The concern about Italy, the euro zone's third-largest economy, prompted an emergency meeting of top European Union officials. Italian government bonds and stocks dropped as investors cut their exposure.

The benchmark 10-year US Treasury note jumped 30/32 in price, pushing its yield down to 2.92 percent on Monday from 3.02 percent late on Friday. 

"We are seeing some follow-through buying in Treasuries, and the European situation continues to fester. It is just an environment where there are a lot of factors that are stacking up as bullish for bonds," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.

A weaker-than-expected jobs report on Friday and data showing China's import growth fell to its slowest pace in 20 months also drove investors away from stocks. 

The MSCI world equity index .MIWD00000PUS fell 2.1 percent to a one-week low and the three major US stock indexes dropped more than 1 percent.

The Dow Jones industrial average was down 151.44 points, or 1.20 percent, at 12,505.76 at the close. The Standard & Poor's 500 Index was down 24.31 points, or 1.81 percent, at 1,319.49. The Nasdaq Composite Index was down 57.19 points, or 2.00 percent, at 2,802.62.

The S&P 500 was briefly down 2 percent, hitting a session low at 1,316.82, near a key support level.

The developments in Italy grabbed the spotlight as investors awaited the first of second-quarter earnings from US companies. The earnings period starts after Monday's closing bell with results from aluminum maker Alcoa (AA.N), which is also a Dow component. 

The pan-European FTSEurofirst 300 index .FTEU3 of top shares fell 1.5 percent to close at 1,097.60 points, its lowest closing level since June 28, while an index of emerging market stocks .MSCIEF lost 1.9 percent.

In the foreign-exchange market, the dollar .DXY rose 1.1 percent against a basket of major currencies. 

The euro was down 1.7 percent at $1.4025, after earlier hitting a session low at $1.3984, its lowest in six weeks.

"Italy would be a challenge that makes Greece look miniature by comparison," said Karl Schamotta, senior strategist at Western Union Business Solutions in Calgary. "We have a wide-ranging contagion issue here -- or at least the perception of one -- and that's making people very nervous." 

JP Morgan said Italian banks are vulnerable because of their high reliance on wholesale funding. Moreover, their government bond holdings stand at 6.33 percent of assets, higher than those of Spanish banks.

Oil fell on the euro zone crisis while gold prices rose. 

On the New York Mercantile Exchange, US crude for August delivery fell $1.05, or 1.09 percent, to settle at $95.15 a barrel.

Spot gold was up 0.3 percent at $1,547.76 an ounce, after hitting $1,556.59, near a two-month high, earlier in the session.