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European markets plunge as debt crisis worsens; gold jumps [Updated]

July 11, 2011 | 11:10 am

European financial markets crumbled Monday as government bond yields surged again in Spain and Italy, deepening fears that the continent's debt crisis had entered a far more dangerous phase.

U.S. stocks also were broadly lower. Gold hit a record high in early trading as investors ran for cover, and the euro plunged.

[Update: The Dow Jones industrial average closed down 151.44 points, or 1.2%, to 12,505.76. Most broader U.S. indexes lost between 1.2% and 2% for the day.]

While European authorities still are wrestling with bailouts of Greece, Ireland and Portugal, the “contagion” from the debt crisis has spread to Spain and Italy over the last week. Market yields on Spanish and Italian bonds have risen for six straight sessions as investors demand ever-higher returns to buy the countries’ debt -- a sign of waning confidence.

The yield on 10-year Italian bonds (charted below) soared to 5.68% from 5.27% on Friday and 4.91% a week ago.

Italy The Spanish 10-year bond yield jumped to 6.03% from 5.68% on Friday.

Many analysts have warned for months that if the crisis ensnared Spain and Italy the future of the eurozone and the 12-year-old euro currency would be threatened because there is no way the rest of Europe could bail out those two huge economies.

“Spain and Italy are nearly five times the size of Greece, Portugal and Ireland and carry nearly four times the volume of debt,” said Michael Darda, economist at MKM Partners in Stamford, Conn. “Thus, they are a much larger threat to the integrity of the eurozone itself.”

European stock markets, which were hammered last week, tumbled again on Monday. The Italian market plummeted 4% after diving 7.2% last week. Spanish stocks slid 2.7% for the day, Portugal slumped 4.1%, France fell 2.7% and the German market sank 2.3%.

The euro plunged 1.7% to a four-month low of $1.402 from $1.426 on Friday.

German Chancellor Angela Merkel said at a press conference that Germany was "steadfastly determined to defend the stability of the euro." But she also said Italy needed to send an "important signal" to markets by agreeing to new austerity moves.

Gold hit a record high early in the session, reaching $1,557.60 an ounce, then eased a bit. The metal closed at $1,548.80 in New York futures trading, up $7.60 for the day. The record closing high was $1,556.70 an ounce on May 2.

U.S. Treasury bonds also benefited as investors sought safety. The 10-year T-note yield fell to 2.93% from 3.03% on Friday, even though budget-cutting negotiations between the White House and Republican leaders seem at impasse.

On Wall Street stocks fell at the opening bell and have been drifting since. The Dow industrials were off 148 points, or 1.2%, to 12,509 at about 11:10 a.m. PDT.

Market bulls have been clinging to hopes that second-quarter earnings reports will reenergize the U.S. market. Aluminum giant Alcoa Inc. will kick off earnings season after the closing bell Monday.

[Update: Alcoa reported operating earnings of 32 cents a share for the quarter, which appeared to just meet analysts' consensus estimate. The company said in its earnings release that its business outlook "remains positive."]

-- Tom Petruno

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