MATT CRAFT,AP Business Writer
NEW YORK (AP) — U.S. stocks fell sharply Thursday after the head of the European Central Bank said there was no existing plan for large-scale government bond purchases, as many in the markets had hoped. The Dow Jones industrial average lost 136 points in afternoon trading.
ECB President Mario Draghi's remarks sent borrowing costs soaring for Italy, Spain and other countries with heavy debt burdens. European stock indexes fell and the euro weakened against the dollar. Draghi made his comments after the central bank cut its benchmark interest rate to 1 percent and took other modest steps to help shore up Europe's financial system.
Bank stocks led the way lower. Citigroup Inc. plunged 7.1 percent; Morgan Stanley 6.9 percent. JPMorgan Chase & Co. slid 4 percent, the most of the 30 large companies in the Dow average.
"People are very nervous that Europe will yet again fail to adequately address the sovereign debt crisis," says David Kelly, chief market strategist for JP Morgan Funds. He says investors overlooked good news on the U.S. economy Thursday: Claims for unemployment benefits dropped, and wholesale companies increased their inventories in expectation of stronger sales.
The Dow Jones industrial average dropped 136 points, or 1.1 percent, to 12,059 as of 2:20 p.m. Eastern. Only two Dow components rose, Coca-Cola Co. and McDonald's Corp. The Dow had risen over the past three days.
The S&P 500 fell 19, or 1.5 percent, to 1,242. The Nasdaq lost 33, or 1.3 percent, to 2,616.
The dollar and U.S. Treasury prices rose as investors shifted money into investments seen as relatively safe. The yield on the benchmark 10-year Treasury note fell to 1.99 percent from 2.03 percent late Tuesday.
In France, French President Nicolas Sarkozy and German Chancellor Angela Merkel tried to muster support from other European leaders for their latest bid to save the euro currency from collapsing under the weight of huge government debts. A summit that begins later Thursday has been billed as a make-or-break moment to convince markets that Europe will take bold enough action to prevent the euro from breaking up.
The yield on benchmark 10-year Italian government bonds jumped half a percentage point, a huge move, to 6.47 percent as investors sold European government debt following Draghi's remarks. The yield on Spain's 10-year bonds rose one-third of a percentage point to 5.71 percent. European markets fell. Italy's main index slumped 4.3 percent; Germany's DAX index 2 percent.
Traders sent yields on Italian government bonds above 7 percent last month, a level at which weaker countries like Greece and Portugal were forced to seek relief from their lenders. When borrowing costs jump too high, it threatens a government's ability to pay off existing debts and could ultimately lead a government to default.
Markets had interpreted recent remarks by Draghi to mean that the ECB would step in to buy government bonds if nobody else would. His comments Thursday dampened those expectations. Large-scale purchases of European government bonds by the ECB would send borrowing rates for indebted European countries sharply lower and ease strains on Europe's financial system.
The Dow had risen 14.5 percent from its low of the year on Oct. 3 through Wednesday's close on growing optimism that European leaders would resolve the region's debt crisis and signs that the U.S. would avoid falling into another recession.
Among companies making big moves:
— Costco Wholesale Co. fell 2.2 percent after reporting earnings that fell short of analysts' expectations. The retailer said higher costs ate up much of a 12.5 percent increase in sales.
— DemandTec Inc. jumped 55 percent on news that International Business Machines Corp. plans to buy the software company for $440 million in cash. DemandTec's software helps businesses set prices for products they sell.
— High-end electric car company Tesla Motors Inc. plunged 10 percent after the company was downgraded by an analyst.
AP Economics Writer Paul Wiseman contributed to this report from Washington.