- Associated Press - Wednesday, November 9, 2011

NEW YORK Trouble on two fronts in the European debt crisis sent American stocks tumbling Wednesday to their biggest loss since the rocky trading of last summer. The Dow Jones industrial average fell nearly 400 points.

Stocks were down from the opening bell after borrowing costs in Italy spiked to dangerous levels, a sign that investors are losing faith in Italy’s ability to repay its national debt.

Italy is potentially too big to bail out, but that’s the problem,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “It’s spiraling out, and the question is now, how do you fix it?”

In Greece, meanwhile, power-sharing talks aimed at avoiding a default disintegrated.

The Italian economy is more than six times larger than that of Greece, which so far has been the center of the continent’s debt problem.

American investors are worried that the consequences from Europe could include a freeze in lending, the disintegration of the euro currency or a bruising recession that would hurt the U.S.

“The market loves a quick solution, and we’re obviously not getting one,” said Mark Lehmann, director of equities of JMP Securities.

The slide was broad: Only a single stock in the Standard & Poor’s 500, Best Buy, finished higher for the day. The Dow finished down 389.24 points, at 11,780.94, its worst showing since Sept. 22. The S&P 500 closed down 46.82 points at 1,229.10, a fall of 3.7 percent, its worst day since Aug. 18. And the Nasdaq composite index finished Wednesday down 105.84, or 3.88 percent, at 2,621.65.

Financial companies were among the hardest hit because they would suffer first if Europe’s debt problem spins out of control. Morgan Stanley stock plunged 8 percent and Goldman Sachs fell 7 percent. In regulatory filings last week, Morgan Stanley reported it had $1.8 billion in liabilities related to Italy, and Goldman said it had $28 billion related to all of Europe.

European stock markets fell sharply, too. The main stock index in Italy finished the day down 3.8 percent. The DAX index in Germany and the CAC 40 in France each declined 2.21 percent.

Italian Premier Silvio Berlusconi promised late Tuesday to step aside after a new budget is passed, but there are concerns the transition will be difficult. Markets see Mr. Berlusconi as an impediment to far-reaching economic reforms.

President Giorgio Napolitano’s office had to declare that there was no doubt Mr. Berlusconi would leave soon, which appeared to soothe investors. “Fears are totally unfounded that Italy may experience a long period of inactivity,” Mr. Napolitano said, adding that “emergency measures” could be adopted without the usual democratic delays.

The benchmark Italian bond rate spiked to 7.4 percent, a startling increase of 0.82 of a percentage point from the previous day. It settled down later in the day, to 7.26 percent after Mr. Napolitano’s announcement.

Across the Ionian Sea, Greece’s laborious power-sharing talks disintegrated into chaos Wednesday, with political leaders failing to name a new prime minister who will take over from George Papandreou and head an interim government, despite three days of negotiations.

The latest setback came less than an hour after Mr. Papandreou made a televised address to the nation saying Greece’s political parties were joining together to save the debt-ridden country from rapidly approaching bankruptcy.