U.S. indexes were moving between small gains and losses before Fitch released its report around 3:15 p.m. Eastern time. The Dow was down just 36 points with an hour of trading left, then plunged to end the day down 190.
Fitch, one of the three main credit ratings agencies besides S&P and Moody's, said in its report that U.S. banks could be "greatly affected" if Europe's debt crisis continues to spread beyond the financially distressed countries of like Greece, Ireland, Italy, Portugal and Spain.
"This is a long-running, slow developing story," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. U.S. stocks had rallied in the past week as new governments took over in Greece and Italy and promised to implement budget reforms. It's a familiar pattern, Ablin said. "It seems like it's always one step forward and two steps back."
The Dow Jones industrial average closed at 11,905.59, a loss of 190.57, or 1.6 percent. It was the Dow's first close below 12,000 since last Thursday.
Concerns that the debt troubles of Greece and Italy could spread have been driving the borrowing rates of France higher on bond markets since the beginning of November. The benchmark borrowing rate on France's 10-year bonds was just 2.54 percent on Oct. 5 but has risen steadily since then, reaching 3.69 percent Wednesday. That's a sign investors worry that France might be in danger of losing its top-drawer triple-A credit rating.
For the moment, Fitch said the risks to U.S. banks from Europe appeared to be "manageable," however investors have been quick to respond to even seemingly minor negative news about how Europe's debt woes might affect the rest of the global financial system.
Fitch said the top five U.S. banks have a total of $114 billion in loans, deposits and other assets tied to French banks. French banks are also large holders of bonds issued by Greece and Italy.
Stock indexes had wavered between gains and losses earlier Wednesday as the price of oil crossed above $100 a barrel for the first time since July.
The jump in the price of crude could weaken the already U.S. fragile economy by raising costs for gasoline, heating oil and airline fuel. Oil futures jumped 3 percent to $102 a barrel as U.S. supplies dropped and a new pipeline deal by a Canadian company threatened to cut them even more.
U.S. economic reports were mixed. Output at the nation's factories, utilities and mines rose at the fastest pace in three months in October, the Federal Reserve said. Production of autos and parts surged 3.1 percent.
Consumer prices largely held steady last month. The Consumer Price Index dropped 0.1 percent in October, led by a steep decline in gas prices. An index of builder sentiment rose to the highest level since May 2010, but is still well below a level consistent with a strong housing market.
In corporate news, Abercrombie & Fitch Co. plunged 13.6 percent after the company reported earnings that fell far short of Wall Street's expectations. The company said rising costs for cotton and other commodities cut into profits.
Dell Inc. dropped 3.2 percent after the company said late Tuesday that its revenues will be held back by an industry-wide shortage of hard drives.