NEW YORK -- Fear that Spain may need a bailout sent its borrowing costs soaring, the euro to a two-year low against the dollar and stocks around the world tumbling as investors pulled back Monday from all manner of risk.
The Dow Jones industrial average, after falling 239 points earlier in the day, ended down 101.11 at 12,721.46. Yields for U.S. government bonds sank to record lows as traders sought the safety of American debt.
Borrowing costs rose sharply for Spain and Italy after news that the Spanish economy contracted by 0.4 percent in the second quarter. Falling economic output makes it more difficult for Spain to deal with its debts.
The Standard & Poor’s 500 index fell 12.14 points to 1,350.52. The Nasdaq composite index dropped 35.15 points to 2,890.15.
"Increases in Spanish borrowing costs have brought back questions about the health of Europe," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "That’s driven a flight to safety."
The selling was widespread. All 10 industry groups within the S&P 500 were down, with materials and health care companies off more than 1 percent. Including Friday’s drop, the Dow is down 222 points, the biggest back-to-back drop in more than a month.
In addition to Spain, in vestors are worried that Greece might get cut off from emergency loans it needs to avoid default.
The Greek government has repeatedly failed to hit targets required for the two bailouts it has received so far.
Adding to the jitters, a Chinese central bank adviser forecast that China’s economic growth could slow from its second-quarter rate of 7.6 percent, which was already the slowest in three years.
Investors had hoped that the world’s second-largest economy would compensate for slowdowns in the U.S. and Europe but now aren’t so sure.
"I wish it were still the weekend," said Lawrence Creatura, a portfolio manager at Fed erated Investors, a mutual fund firm. "People were initially worried just about the Europe, but now it’s spread to China and beyond."
In Spain, the yield on the benchmark 10-year government bond rose to 7.43 percent, the highest since the euro was launched in 1999 and a level considered unsustainable for more than a few months. The fear was registered in other trading, too. The cost for investors to take out insurance on Spanish government debt soared to a record high Monday.
The message: After Spanish banks had to seek money from international creditors to stay afloat, now maybe the Spanish government needs help.
The prospect of bailing out Madrid is worrisome for Europe because the potential cost far exceeds what’s available in existing emergency funds.
The fear ratcheted up over the weekend when a southern region of Spain announced that it might need a financial lifeline from Madrid to make ends meet. That followed news last week that an eastern region of the country had asked for help.