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Stocks fall worldwide on renewed worries about Europe, Chinese inflation and Fed independence

November 16, 2010 |  3:14 pm

Investors drove down stock prices around the world on Tuesday amid growing fears that policymakers in China, Europe and the United States may not have the power to encourage more economic growth.

The Standard & Poor’s 500 index had its worst day in three months, falling 19.41 points, or 1.6%, to 1178.34. The Dow Jones industrial average fell 178.47 points to 11,023.50, also a 1.6% drop.

In Europe the damage was even worse, with the leading indexes falling 1.9% in Germany, 2.4% in Britain and 2.5% in Spain.

The most immediate European problem has been Ireland’s troubled economy, but there are growing fears that those problems could spread to the rest of the continent and revive uncertainty that hurt European markets earlier this year.

“The word 'contagion' is back in the headlines,” said Doug Kass, a general partner at Seabreeze Partners in Florida.

The European Central Bank has been pushing Ireland to accept economic aid but Irish leaders have so far expressed a desire to soldier on without outside help.

The fears about the European economy drove down the value of the euro against the dollar. The euro fell to $1.349, down from $1.360 on Monday and the lowest since Sept. 27.

Investors also were spooked by indications that Chinese policymakers may be moving to put a damper on the roaring economic growth there by trying to to rein in inflation. Their moves have been widely expected, but lingering fear remains that the policies could go too far.

“People get very nervous any time you try to cool off an economy,” said Anthony Chan, chief economist at JPMorgan Chase’s private bank. “You are dealing with blunt tools and there is always the risk that you overdo it.”

These global concerns added on to the lingering doubts about the Federal Reserve’s recently announced $600-billion program to stimulate the American economy.

On Tuesday, members of Congress who have criticized the program proposed that the central bank’s mandate be pared down. This worried investors who see an independent central bank as a key stabilizing force in the economy.

“If the Fed loses its independence and becomes politicized, it’s a negative,” said Kass.

-- Nathaniel Popper