NEW YORK (AP) — A warning from Standard & Poor's that the agency might lower its rating on U.S. government debt sent stocks on their worst slide in a month on Monday.
The Dow Jones Industrial Average and the S&P 500 index both had their steepest falls since March 16. More bad news about Europe's debt crisis also pushed markets lower.
The Dow fell 192 points, or 1.6 percent, to 12,149, in afternoon trading. The Standard & Poor's 500 fell 19, or 1.5 percent, to 1,300. The Nasdaq composite fell 44, or 1.6 percent, to 2,721.
S&P reaffirmed the U.S. government's top credit rating of AAA but expressed doubts that Washington would move quickly to curb the country's mounting budget deficits.
U.S. government bonds are widely seen as the benchmark for the safest kind of debt. The highly unusual move by the ratings agency to lower its outlook for U.S. debt to "negative" from "stable" caught investors off guard.
The change means that S&P could lower its rating on U.S. government debt in the future. If that were to happen, the U.S. government would have to pay more to borrow money when it issues bonds.
Since the government's borrowing rates are used as a benchmark for nearly all kinds of debt, borrowers of all kinds also would pay higher rates, including companies, homeowners and credit card users.
"The credit worthiness of the country is the underpinning on which all other asset classes are valued," said Jack Ablin, chief investment officer at Harris Private Bank. "If all of a sudden the credit quality of U.S. Treasurys isn't as high as people perceive, we could see (an) erosion of confidence and values decline."
Kim Rupert, managing director of global fixed income analysis at Action Economics, called S&P's move a "warning sign" that the U.S. needs to get its deficit under control.
European markets lost even more than the American. France's CAC-40 closed down 2.3 percent and Germany's DAX lost 2.1 percent.
U.S. government debt prices fell after the S&P warning came out but soon recovered. The yield on the 10-year Treasury note, which rises when the note's price falls, jumped as high 3.47 percent after the S&P's warning, from 3.38 percent just before. By early afternoon, the yield was back at 3.38 percent.
The euro fell against the dollar as Europe's debt problems spread. Spain had to pay a much higher interest rate on new debt. There was speculation of a possible default by Greece, and a nationalist party in Finland made big gains in an election Sunday.
The euro was worth $1.4232 in afternoon trading, down from $1.4436 Friday.
Citigroup Inc. rose 1 percent to $4.45 after reporting earnings that came in just above analysts' expectations. The bank's income fell 32 percent but it was able to set aside less money to cover losses from loan defaults as more customers made payments on time.
Several other big banks are due to report earnings this week. Traders are keen to determine whether banks are lending more. The upcoming reports from Goldman Sachs Group Inc. and Wells Fargo & Co. are "crucial for the markets," says Quincy Krosby, a market strategist for Prudential Financial.
Industrial supply company W.W. Grainger rose 2.3 percent. The company's first-quarter income soared after it began offering new products and pushed into Mexico, Colombia and Japan.
Oil fell slightly to $107 a barrel.