Stocks drop as euro and Korean concerns mount

NEW YORK (AP) - The Dow Jones industrials plunged below 10,000 Tuesday after traders dumped stocks on worries about the global economy and tensions between North and South Korea.

The Dow fell about 160 points in afternoon trading. It has fallen 1,346 points, or more than 12 percent, from its recent high of 11,205, reached April 26. The Dow and broader stock indexes all fell more than 1 percent.

Investors also exited the euro and commodities, including oil, and again sought safety in Treasurys. That drove interest rates lower. The benchmark 10-year note's yield fell to its lowest level since April 2009.

World stock markets also tumbled. Investors are not focusing on current signs of growth, but instead trying to gauge where the global economy will be later this year. Pessimism, particularly about Europe, has replaced a hopeful tone among traders early in the year.

"Market participants feel like they're walking on eggshells," said Oliver Pursche, executive vice president at Gary Goldberg Financial Services in Suffern, N.Y. "Every small piece of potentially bad news is being exaggerated and mentally being fast-forwarded to the worst-case scenario."

One sign of the distress can be found in the London interbank offered rate, or Libor. That's the rate at which banks lend to one another. There are now worries about which banks might be hardest hit if countries like Greece, Portugal or Spain default on their debt.

The concern is pushing Libor for three-month loans in dollars higher. The rate rose substantially Tuesday, rising to 0.53 percent from 0.51 percent Monday. Libor had jumped in the fall of 2008 after the collapse of Lehman Brothers helped trigger a crisis of confidence throughout the global financial system.

European Union leaders warned Tuesday that the continent's economy would stagnate unless governments make major reforms to promote growth. The problem is, though, that large debts in some countries make it difficult to implement stimulus measures to rally economies.

The euro approached a four-year low, which it set last week. The euro dropped to $1.2244, bringing it within a penny of the low of $1.2146 it touched last week.

Traders have been selling the euro heavily in recent weeks because of uneasiness over whether steep budget cuts in countries like Greece, Spain and Portugal will drag down an economic recovery on the continent. Italy was set to become the latest European nation to announce spending cuts to reduce its deficit.

Markets were also hurt by reports that North Korean leader Kim Jong Il ordered his military to combat alert because of rising tensions on the Korean peninsula. North Korea also said it would cease communication and relations with Seoul. South Korea has said North Korea was responsible for the sinking of a South Korean warship two months ago. Major indexes in Japan and Hong Kong fell more than 3 percent.

A disappointing report on U.S. home prices added to a downcast mood among many traders. The Standard & Poor's/Case-Shiller 20-city home price index fell 0.5 percent in March from February, a sign that the housing market remains weak even as mortgage rates are still near historic lows. There are concerns that last month's expiration of the government's home buyer tax credit will hurt sales in the coming months.

A better-than-expected report on consumer confidence didn't stop the selling. The Conference Board's consumer confidence index rose for the third straight month, climbing to 63.3 in May from 57.7 last month.

In midday trading, the Dow fell 163.16, or 1.6 percent, to 9,902.12. It had fallen as much as 292 points in the first 15 minutes of trading.

The Standard & Poor's 500 index fell 17.76, or 1.7 percent, to 1,056.89. The index hit its lowest level of the year in early trading, dropping to 1,040.78.

The Nasdaq composite index fell 39.91, or 1.8 percent, to 2,173.64.

Tuesday's slide follows a sharp drop Monday. The Dow lost 80 points in the last 15 minutes of trading to close down nearly 127. Traders said the sign of flagging confidence made it likely that more selling was to come.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.15 percent from 3.20 percent late Monday. It fell as low as 3.07 percent, its lowest level since April 2009.

The yield on the 30-year bond briefly fell below 4 percent for the first time since October, before rising slightly. It is down to 4.06 percent from 4.08 percent late Monday.

Crude oil fell $1.66 to $68.55 a barrel on the New York Mercantile Exchange. Gold rose.

George Feiger, CEO of Contango Capital Advisors, said U.S. stocks are now priced about where they should be and that the slide on Wall Street isn't warranted. He doesn't expect the problems in Europe will spoil a U.S. recovery.

"I think it's an overreaction here," he said, referring to the U.S. "In Europe, it's a real problem and I think things are going to get worse."

Investors were also concerned about a bill in Congress that will overhaul financial regulation. The Senate and House are reconciling their versions of the proposed reform.

Traders shrugged off a better-than-expected report on existing home sales from April. Such upbeat economic reports had helped push stocks consistently higher earlier in the year.

The Russell 2000 index of smaller companies fell 13.42, or 2.1 percent, to 627.79.

Britain's FTSE 100 dropped 2.5 percent, Germany's DAX index lost 2.3 percent, and France's CAC-40 plummeted 2.9 percent. Japan's Nikkei stock average fell 3.1 percent. Hong Kong's Hang Seng fell 3.3 percent.