Fear that Spain may need a bailout sent its borrowing costs soaring, the euro to a two-year low against the dollar and stocks around the world tumbling as investors pulled back Monday from all manner of risk.
The Dow Jones industrial average, after falling 239 points earlier in the day, ended down 101.11 at 12,721.46. Yields for U.S. government bonds sank to record lows as traders sought the safety of American debt.
Borrowing costs rose sharply for Spain and Italy after news that the Spanish economy contracted by 0.4 percent in the second quarter. Falling economic output makes it more difficult for Spain to deal with its debts.
"Increases in Spanish borrowing costs have brought back questions about the health of Europe," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "That's driven a flight to safety."
The selling was widespread. All 10 industry groups within the S&P 500 were down, with materials and health care companies off more than 1 percent. Including Friday's drop, the Dow is down 222 points, the biggest back-to-back drop in more than a month.
In addition to Spain, investors are worried that Greece might get cut off from emergency loans it needs to avoid default. On Tuesday, inspectors from its international creditors arrive in the country to check on its progress in cutting its budget and in meeting other conditions it had agreed to in exchange for aid.
The Greek government has repeatedly failed to hit targets required for the two bailouts it has received so far.
Adding to the jitters, a Chinese central bank adviser forecast that China's economic growth could slow from its second-quarter rate of 7.6 percent, which was already the slowest in three years.
Investors had hoped that the world's second-largest economy would compensate for slowdowns in the U.S. and Europe but now aren't so sure.
"I wish it were still the weekend," said Lawrence Creatura, a portfolio manager at Federated Investors, a mutual fund firm. "People were initially worried just about the Europe, but now it's spread to China and beyond."
In Spain, the yield on the benchmark 10-year government bond rose to 7.43 percent, the highest since the euro was launched in 1999 and a level considered unsustainable for more than a few months. The fear was registered in other trading, too. The cost for investors to take out insurance on Spanish government debt soared to a record high Monday.
The message: After Spanish banks had to seek money from international creditors to stay afloat, now maybe the Spanish government needs help.
The prospect of bailing out Madrid is worrisome for Europe because the potential cost far exceeds what's available in existing emergency funds.
The fear ratcheted up over the weekend when a southern region of Spain announced that it might need a financial lifeline from Madrid to make ends meet. That followed news last week that an eastern region of the country had asked for help.
In a move that recalled the global financial crisis four years ago, Spain's market regulator on Monday said it was temporarily banning short selling of shares on its stock indexes. In a short sale, an investor seeks a profit by betting that the price of a certain stock will fall.
The U.S. briefly banned short selling of dozens of stocks in 2008 as prices were tumbling.
Bank stocks, which tend to take a hit when fear flares in Europe, were among the biggest losers. Citigroupstock dropped 53 cents, or 2 percent, to $25.34.
The euro slipped just below $1.21 against the dollar, its lowest since June 2010.
There were also signs that a global economic slowdown is hitting U.S. companies that rode out the anemic recovery well by selling more abroad. Now, they can't grow those sales as fast as before, and what they do sell has fallen in value as foreign currencies have weakened against the dollar. That's because U.S. companies must translate foreign currency earnings into dollars when reporting to investors, and weaker foreign currencies fetch fewer dollars.
While global sales at McDonald's restaurants open at least a year rose 3.7 percent, for instance, profits slid by about the same rate due to currency exchange. McDonald's generates about two-thirds of its revenue outside the U.S.
"A disproportionately large amount of revenue overseas is seen as a negative today," said Creatura of Federated Investors. "The list of weakening overseas markets is getting longer by the day."
Stock in the world's largest hamburger chain slid $2.64, or 2.9 percent, to $88.94 after the company fell short of most Wall Street expectations for both net income and revenue.
Hasbro is also getting hurt by currency trading. If not for the surge in the dollar, its international revenue in the second quarter would have risen 5 percent, instead of falling 4 percent, the toy maker said Monday. Still, the company beat analyst estimates of net income, thanks partly to cost cutting.
Stock in Hasbro, whose products include Monopoly and Scrabble, rose $1.35, or 4 percent, to $35.19.
In other stock news:
— RailAmerica Inc., a short-line railroad operator, rose $2.44, or nearly 10 percent, to $27.25 after announcing it planned to sell itself to another short-line operator, Genesee & Wyoming, for $1.39 billion in cash.
— Halliburton, an oil and natural gas services firm, rose 2.4 percent after reporting flat earnings for the second quarter. The company has benefited lately from selling oil drilling around the world.
— Peet's Coffee and Tea surged 28 percent to $73.05 after announcing a sale to Joh A. Benckiser, a privately-held consumer goods company in Germany.
– AP Business Writer Matthew Craft contributed to this report.