Stocks plunge again on European debt worries

It seems a trillion dollars can do only so much.

Four days after the announcement of a rescue package nearly that big for debt-burdened European countries, stock markets around the world tumbled Friday on a revival of worries about the continent’s financial stability -- and fears that the region’s woes could slow the global economic recovery.

Despite some freshly released data further documenting the U.S. economic recovery, the Dow Jones industrial average sank 162.79 points, or 1.5%, to 10,620.16. Broader indexes fell more sharply. The Standard & Poor’s 500 index lost 1.9%, while the Nasdaq composite index slid 2%.

It could have been worse. Less than an hour before the closing bell all three indexes were down more than 2%, extending the market’s recent resurgence of volatility.

In the last three weeks, the Dow has risen or fallen at least 100 points 11 times. In the seven weeks before that, the index recorded only three triple-digit moves. Even though the blue chips notched a 2.3% gain for the week and are up this year, the frequent swings have fanned the fears of many individual investors.

“This increase in volatility has really been amazing,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Va. “If you are an average investor -- a lot of folks are just finally throwing in the towel because they can’t stand the pain.”’

The concerns about Europe were supposed to have been put to rest at the start of the week when European leaders and the International Monetary Fund agreed on the bailout package for Greece and other debt-plagued countries. But doubts quickly emerged about the details of the plan and its implementation.

The jitters were not helped by a Spanish newspaper report Friday that, during the rescue talks late last week, French President Nicolas Sarkozy had threatened to abandon the European currency if Germany didn’t support the aid package. Although Germany subsequently backed the plan, the report -- denied by those at the talks -- added to speculation that the decade-old euro wouldn’t survive the troubles in some of Europe’s smaller economies.

In the foreign exchange market, the 16-nation euro slumped for a fourth straight day, nearing a four-year low against the dollar. The European currency ended New York trading at $1.239, down 1.4% on the day and 3.2% over four days.

An index of European blue-chip stocks fell 4.7% on Friday, while key share indexes slid 4.6% in France, 5.3% in Italy and 6.6% in Spain. But the region’s markets still posted sharp gains for the week.

Demand for European government bonds weakened, pushing up their yields, in a direct challenge to the European Central Bank, which this week began buying government bonds for its own account in an attempt to hold down market interest rates.

As they sold European stocks and bonds, some investors poured into the perceived safety of U.S. Treasury securities, lowering their yields. The benchmark 10-year T-note dropped to 3.44% from 3.56% late Thursday.

Although Europe emerged from its recession last year and has recorded some economic growth in recent quarters, the current troubles are leading some economists to predict that that continent’s output would start falling again.

“Even under the best of circumstances, Europe is back in recession,” said Mark Zandi, chief economist with Moody’s “It’s just a bad brew of things.”

Dick Bove, a banking-industry analyst at Rochdale Securities, downgraded the stocks of two leading European banks Friday.

“It appears to me that Europe is just in the first phase of this crisis,” Bove wrote. “Sovereign defaults seem highly likely before the problem is resolved.”

Zandi said a another European recession would not be enough to stop U.S. growth but would hit certain sectors hard.

On Friday, U.S. financial companies -- which could be hurt, at least indirectly, by European defaults -- led the domestic stock market down.

Also falling sharply were prices of commodities, which could suffer if global economic growth slows.

Among the U.S. economic reports out Friday, the Federal Reserve said industrial production climbed in April, marking the ninth increase in 10 months, while the Commerce Department said retail sales climbed 0.4%, their seventh straight gain.

But for now the eyes of investors are trained across the ocean.

“People are nervous and they don’t know what to make all of this,” Zandi said. “There are a lot of moving parts.”