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Stocks plunge on debt impasse and economic fears

July 27, 2011 |  1:57 pm

Stocks tumbled Wednesday as the debt drama in Washington and more signs of weakness in the economy drove some investors for the exits.

The Dow Jones industrial average dropped 198.75 points, or 1.6%, to 12,302.55, a four-week low. Broader market indexes fell more sharply.

“It all centers around this game of fire they’re playing in Washington,” said Ryan Larson, head of equity trading at RBC Global Asset Management in Chicago.

Trader727 There were no signs that Democrats and Republicans were closer to a deal to raise the $14.3-trillion federal debt ceiling by Tuesday, the day the Treasury says it will run out of cash to pay its bills.

That raises the specter of a debt default, even though many on Wall Street say it’s still unlikely the government would fail to pay bondholders. Other payments, however, could be delayed.

Financial markets have been relatively calm in recent days, betting that a deal would emerge in Washington to at least raise the debt ceiling temporarily. But on Wednesday investors’ nerves clearly became more frayed.

It didn’t help that the Federal Reserve’s latest report on U.S. economic trends showed that growth slowed in the majority of the Fed’s 12 reporting regions in June and early July -- a reminder that, apart from the debt-ceiling mess, the economy continues to struggle.

Also, the government reported that orders for big-ticket items from manufacturers fell 2.1% in June. Economists had expected a 0.3% increase.

Shares of technology and industrial companies led the day’s sell-off, along with small-company stocks. All of those sectors are sensitive to the economy’s swings.

The tech-heavy Nasdaq composite index slid 75.17 points, or 2.6%, to 2,764.79, the biggest one-day drop since Feb. 22.

The Russell 2,000 small-stock index dived 3%, its worst loss since June 1.

The Dow’s decline was its largest since March 16.

Most major market indexes still are in positive territory for the year. The Dow is up 6.3%, the Nasdaq is up 4.2% and the Russell index is up 2.2%.

Normally, downbeat economic reports, and a stock market plunge, would encourage investors to buy Treasury securities as a haven.

But with the debt-ceiling limit approaching, some investors have become more wary of buying government bonds. Treasury yields rose Wednesday after the government’s sale of $35 billion of new five-year notes saw weaker-than-expected demand.

The 10-year T-note yield, a benchmark for mortgage rates, edged up to 2.98% from 2.96% on Tuesday.

Gold, a classic haven in times of turmoil, rose as high as $1,631 an ounce, a record, but fell back to close off $1.60 to $1,615. The metal was undermined by a rebound in the battered dollar.

In one positive note, Dunkin' Donuts owner Dunkin' Brands got a rousing welcome in the stock's debut on Nasdaq. The company's shares soared to close at $27.85, up $8.85, or 46%, from their initial public offering price on Tuesday.

RELATED:

Dollar gets trashed as U.S. debt fears deepen

S&P chief says firm's analysts don't believe U.S. will default

California gets $5.4 billion bank loan to bypass U.S. debt drama

-- Tom Petruno

Photo: On the New York Stock Exchange floor on Wednesday. Credit: Mario Tama / Getty Images

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