Fearing a financial rupture in Europe, investors around the world fled from risk Wednesday. They punished stocks and the euro and flocked to bonds, driving the yield on the benchmark 10-year U.S. Treasury note to its lowest point since World War II.
In the United States, where concerns about Europe have already wiped out most of the strong gain that stocks had from January through March, major averages fell more than 1 percent. The Dow Jones industrial average closed down 161 points.
With Spain's banking system teetering and Greece's political future unclear ahead of crucial elections next month, European stocks lost even more. The euro dropped below $1.24, to its lowest point since the summer of 2010.
"Everyone's just afraid that if Europe doesn't get its act together, there will be a big spillover in the U.S.," said Peter Tchir, manager of the hedge fund TF Market Advisors.
He said the uncertainty in Europe was reminiscent of the financial crisis in the fall of 2008, when it was briefly unclear in the United States whether banks would be bailed out and "we had these giant swings up and down."
Wall Street, which woke up to increased anxiety over higher Spanish borrowing rates, was down from the opening bell.
The Dow closed down 160.83 points, or 1.3 percent, at 12,419.86. The Dow has had a miserable May, losing more than 6 percent, and is on track for its first losing month since September.
The Standard & Poor's 500 index lost 19.10 points to 1,313.32. The Nasdaq composite index fell 33.63 to 2,837.36. Energy stocks were hit hardest because of a big drop in the price of oil, but stocks in all major industries fell.
The trigger for Wednesday's sell-off was Spain, where the banking system is under strain a week after its fourth-largest bank required $23.8 billion in government aid to cover souring real estate loans.
Investors are increasingly worried that problems at the bank, Bankia, might recur at other Spanish banks. Many lent heavily during the nation's real estate bubble. Losses from the real estate crash might be too big for Spain's government to shoulder.
On Wednesday, borrowing rates rose sharply for Spain and Italy, which are seen as the latest problem cases in a debt crisis that has rocked global markets for more than two years. Traders dumped bonds issued by those governments.
The yield on Spain's 10-year bonds, a key indicator of market confidence in the country's ability to continue to make payments on its debt, shot as high as 6.69 percent, the highest since the euro currency was launched in 2002.
Intense demand for low-risk, easily tradable securities led investors to buy U.S. government debt. The yield on the 10-year Treasury note plunged to 1.61 percent from 1.74 percent late Tuesday.
Wednesday's yield appeared to be the lowest since 1945, said Bill O'Donnell, head of U.S. Treasury strategy at the Royal Bank of Scotland, citing data from the European Central Bank and other sources.
Federal Reserve daily records only go back to 1962, and those reflect a previous record of 1.70 percent, set May 17.
"There's just a massive flight to safe-haven assets today," O'Donnell said.
He characterized the rush into U.S. bonds by citing a well-known, unsavory analogy made by Richard Fisher, the head of the Federal Reserve's Dallas bank: "The U.S. is the prettiest horse in the glue factory."
Yields on German government bonds, also seen as safe, turned lower, too.
Concern about Europe was everywhere: The European Commission said consumer confidence fell sharply across the region last month. Spaniards withdrew money from their banks, a trend that could force more banks to demand government aid.
Fear also spread about the Spanish government's ability to go on without itself being bailed out. Spain's main stock index closed down 2.6 percent.
An opinion poll in Greece showed that the far-left Syriza party is gaining support ahead of elections June 17. Syriza opposes the system of bailouts and sharp budget cuts that have kept Greece afloat but also gutted its economy.
If the party wins, Greece may be forced to exit the euro currency. Uncertainty about the future of the currency union would likely boost borrowing costs across the region, threatening nations that have received bailouts, like Portugal, and those that might need them, like Italy.
Until the Greek elections next month, things will be too uncertain for the U.S. market to sustain a meaningful rally, said David Kelly, chief market strategist at J.P. Morgan Funds.
If Greece's leaders allow the bailouts to continue and European governments start spending to spur growth, Kelly expects the market eventually to rise. If Syriza wins and Greece is expelled from the euro, he expects a volatile market for months.
Amid the tumult, the European Commission called on the 17 countries that use the currency to create a "banking union" that can centrally oversee and, if needed, bail out national banks.
If Europe's financial crisis plunges it into a deep recession, global economic growth will likely falter, reducing demand for commodities and machines that power growth.
Fearing that outcome, traders pushed the stocks of heavy equipment maker Caterpillar and aluminum company Alcoa to among the biggest declines of the 30 companies that make up the Dow.
The euro fell as low as $1.2360, the lowest since the summer of 2010. Benchmark stock indexes closed down 2.2 percent in France and 1.8 percent in Italy and Germany.
When banks and big investors get frightened, they sell stocks of all countries and the bonds of countries in trouble. They buy Japanese yen, German bonds and especially U.S. Treasurys.
Such purchases are not about turning a profit, said O'Donnell of RBS. That's why German government two-year notes are paying zero percent: People are simply handing their money over for safekeeping.
The U.S. Treasury market is still considered one of the safest places in the world to stash billions in a hurry. At $11 trillion, no other market is as large, so there's always somebody ready to buy or sell Treasurys.
"When people just want to get their money back, there's not a lot of competition," O'Donnell said.
Food and energy commodities fell sharply. Crude oil lost more than $3 to below $88 a barrel. Crude has been falling steadily since the beginning of May, when it traded as high as $106 a barrel.
Kelly, of J.P. Morgan Funds, said investors should remember that the U.S. is on firmer economic footing than Europe, and make sure their portfolios could withstand a market rally or a downturn, because both outcomes look possible.
"Things could be much better, or much worse, than the markets have priced in," Kelly said. "The only logical investment strategy is to be balanced — to get to the middle of the boat."
Among U.S. stocks making moves:
— Monsanto, the agricultural company, was one of the few big gainers in a sea of red. It jumped 2.2 percent after its CEO said this year's earnings will likely surge 25 percent, far more than Wall Street had been expecting. Sales were strong in its seed and chemicals business, including Roundup herbicides.
— Research in Motion, maker of the BlackBerry, plunged 7.1 percent after the company said late Tuesday it had hired a team of bankers to help it weigh its options — Wall Street jargon for a possible sale or reorganization. RIM's business has been crumbling as smartphone users move to iPhone and Android devices.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.
AP Business writer Matthew Craft in New York contributed to this report.