Italy catches cold as world markets dip overnight

Shares were down on Wall St overnight, as fears grew that the European debt crisis may be spreading. Photo / Thinkstock

Fear that the debt crisis in Europe is spreading has sent investors running for the exits, hammering both global equities and the euro.

Results from stress tests on banks in Italy due this week heightened concern about the nation that has the second highest debt-to-output ratio in the euro-zone and is its third-largest economy.

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

In afternoon trading, the Dow Jones Industrial Average shed 1.35 per cent, the Standard & Poor's 500 Index dropped 1.38 per cent and the Nasdaq fell 2.12 per cent.

The Stoxx Europe 600 Index dropped 1.4 per cent. The euro suffered too, with the currency last down 1.6 per cent at US$1.4032, after earlier falling as low as US$1.3984.

"The size of Italy's economy makes sovereign credit issues there a much greater concern," Gary Flam, who helps oversee US$6.5 billion at Bel Air Investment Advisors, told Bloomberg News.

"Greece, Portugal and Ireland are manageable given the small size of those economies relative to the EU. Once you cross the threshold into Spain and Italy, you're taking a big step up. That's a major negative," Flam said.

Italian and Spanish government bonds dropped, as investors demand euro-era record premiums to hold Italian, Portuguese and Spanish debt over German bunds.

US Treasuries benefitted. The yield on 10-year note yields fell 11 basis points to 2.92 per cent at 2.31pm in New York, according to Bloomberg Bond Trader prices.

Meanwhile, US president Barack Obama said he won't extend the deadline for a vote on raising the US$14.3 trillion debt ceiling, seeking to increase pressure on Republicans to return to the negotiating table and agree on a long-term plan to rein in the country's debt.

News Corp posted the biggest drop in the S&P 500 as the scandal enveloping the media giant in the U.K. continues to widen.

News Corp's 7.8 billion-pound (US$12.4 billion) bid to buy all of pay-TV operator British Sky Broadcasting Group will be referred to the top UK.competition authority, according to Bloomberg.

UK deputy premier Nick Clegg urged Rupert Murdoch to do the "decent" thing and abandon the takeover plan.

There's hope that the release of Alcoa Inc's results after the market closes in New York will help refocus investors.