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World markets sink on debt, growth fears; U.S. holds up better than most

May 23, 2011 | 11:50 am

It's a brutal day for stock markets worldwide as Europe's debt crisis worsens and fresh data point to slowing growth in China.

But the U.S. is looking better than most other markets, a sign that Wall Street is viewed as a relative haven -- for now.

The Dow Jones industrial average was down 118 points, or 0.9%, to 12,394 at about 11:50 a.m. PDT. [Updated at 1:20 p.m.: The Dow closed off 130.78 points, or 1.1%, to 12,381.26.)

Nervous money flowed into U.S. Treasury bonds, pushing the 10-year T-note yield down to 3.13% from 3.15% on Friday. Gold also attracted buyers, rising $6.50 to $1,515.30 an ounce in New York.

Nysetraderz Europe’s government-debt woes deepened over the weekend after Standard & Poor’s warned that it may downgrade Italy’s credit rating and as Spain’s ruling party suffered a major defeat in nationwide elections.

While most of the focus in Europe this year has been on the heavy debt burdens of Greece, Ireland and Portugal -- all three of which have been bailed out by the European Union -- Italy and Spain are far larger economies, and any thought that they, too, would need debt bailouts strikes terror in financial markets.

With rising expectations that Greece will be unable to pay private bondholders in full despite previous help from the EU, “Europe’s failing approach to its debt crisis has renewed fears of a contagious sovereign default and a possible euro zone breakup, sending shockwaves across capital markets,” said Lena Komileva, a currency strategist at Brown Bros. Harriman in London.

The euro sank 0.7% to $1.406, its lowest since mid-March.

Interest rates jumped on government bonds of Greece, Portugal and Ireland, with the annualized yield  on two-year Greek bonds reaching a record 26.3%, up from 25.5% on Friday, as the market price of the securities continued to sink.

Italian bond yields also rose, but modestly. The yield on two-year Italian notes edged up to 3.07% from 3% on Friday.

The reaction was much worse in the Italian stock market, which plummeted 3.3% to its lowest since mid-January. Stocks also fell 2% in Germany, 2.1% in France and 1.9% in Britain.

Earlier, Asian stock markets had slumped overnight on worries over Europe and after a survey of manufacturing activity in China pointed to a further slowdown in May.

The Shanghai stock market plunged 2.9% to its lowest since early February. China’s slide helped pull the Japanese market down 1.5%%, Hong Kong down 2.1% and India down 1.8%.

The U.S. dollar, the great weakling of global currencies for much of the last nine months, suddenly is back in demand as global investors look for a place to hide. The DXY index of the dollar’s value against six other major currencies is up 0.9% to 76.13, its highest level since March 30.

But that won't be welcomed by American exporters that have benefited from the greenback's slump.

-- Tom Petruno

Photo: On the New York Stock Exchange floor on Monday. Credit: Jin lee / Bloomberg News