Stocks sink as Italian borrowing costs soar

U.S. stock indices fell more than 3 percent today as fears grew that the Italian debt crisis would drag the rest of Europe down.

The Dow Jones industrial average slid 389.24 points, or 3.2 percent, to end the day at 11,780.94. The S&P 500 fell 46.81 points, or 3.67 percent, to 1,229.11. The Nasdaq Composite plunged 105.84 points, or 3.88 percent, to close at 2,621.65.

While stocks jumped on Tuesday following the news that Italian Prime Minister Silvio Berlusconi would resign once the Italian government approved austerity measures, CNBC reported, two announcements sent stocks tumbling back down today.

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Clearinghouse LCH Clearnet SA raised the level of collateral required to trade Italian government bonds, Reuters reported, and that pushed yields on two- and 10-year bonds above 7 percent, the highest since the Euro was founded in 1999.

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That level is seen as unsustainable, according to Reuters, raising the possibility that Italy may be forced to seek a bailout that could tip the euro zone into recession. An international bailout of Italy would be far larger than those of Greece, Ireland and Portugal, the New York Times reported.

“This is a new phase of the crisis,” Nicolas Veron, a senior fellow at Bruegel, a Brussels-based research organization, told the Times. “This is uncharted territory.”

Investors were also shook by news reported by the German business newspaper Handelsblatt that German Chancellor Angela Merkel's party was considering a proposal to allow European nations to exit the euro zone.

“It's just like a scary movie as it never ends,” Keith Wirtz, chief investment officer at Fifth Third Asset Management in Cincinnati, told Bloomberg Businessweek. “The overarching problem is that most of the economies in Europe can't sustain the size of their governments. We're going to have this headache for a long time to come.”

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