- Associated Press - Monday, July 18, 2011

NEW YORK — Not even a string of better earnings reports could stave off worries about debt on Monday.

Europe’s banking troubles and an impasse over lifting the U.S. government’s borrowing limit helped drag down stock markets in the U.S. and Europe. Gold rose above $1,600 an ounce as investors sought safe places to park money.

The S&P 500 index dropped 10.70 points, or 0.8 percent, to close at 1,305.44.

The Dow Jones industrial average and Nasdaq composite index gave up their gains for the month. The Dow fell 94.57 points, 0.8 percent, to 12,385.16. The Nasdaq fell 24.69 points, or 0.9 percent, to 2,765.11.

The results of stress tests on European banks released last week came under deeper scrutiny. Eight banks failed the test aimed at measuring how well they would hold up under additional financial strain.

But the tests didn’t take into account how banks would fare if Greece or Italy defaults, says Dan Greenhaus, chief global strategist at BTIG. Greece and Italy are among the countries most at risk of defaulting on their debts.

Italy not only has Europe’s third largest economy but also the world’s third-largest bond market at 1.8 trillion euro ($2.5 trillion). “So far European officials have failed to stabilize a country as small as Greece,” Greenhaus said. “So we have little reason to have faith they’ll fix a country as big as Italy.”

In the U.S., the debt limit debate remains at a standstill in Washington. The Treasury Department says the limit must be raised by Aug. 2 or the government risks defaulting on its debt.

But a deal needs to be reached soon, possibly as early as Friday, to have legislation ready for President Barack Obama to sign by the deadline. Rating agencies warned last week that the impasse puts the country’s triple-A credit rating grade at risk.

House Republicans are preparing to vote Tuesday on their plan that would lift the debt ceiling but also slash spending. The proposal includes a balanced-budget amendment to the U.S. Constitution. President Barack Obama pledged to veto the bill.

The latest delay in reaching a deal is beginning to weigh on markets.

U.S. banks stocks, which would get hit hard in the event of a default, fell sharply. Bank of America slid 2.8 percent, to $9.72, the biggest drop for the 30 stocks in the Dow average. The bank recently announced an $8.5 billion settlement with a group of mortgage bond investors and reports earnings Tuesday. It’s the only major bank trading in the single digits.

Gold rose for the tenth day in a row, jumping 0.8 percent to $1,602.40 an ounce. That’s another record in dollar terms, but it’s still below the high reached in the early 1980s once inflation is taken into account.

Gold has been rising steadily since the start of the month as the countries considered at risk of default expanded beyond Greece to include Italy and the U.S. Traders have been buying gold as an alternative to holding dollars and euros as the debt problems in the U.S. and Europe undermine confidence in both currencies.

Adding to the worries for investors: lowered expectations for the U.S. economy. Economists at Goldman Sachs lowered their estimates for U.S. economic growth in the second and third quarters of the year late Friday. The economists cited weak sales growth and a drop in consumer confidence in cutting their forecast for second-quarter growth to 1.5 percent from 2 percent. Goldman lowered its third quarter estimate to 2.5 percent from 3.25 percent.

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