Wall Street slips on euro zone contagion fears

NEW YORK (Reuters) - Stocks were lower on Monday as rising Spanish and Italian bond yields indicated increasing fear of euro zone debt crisis contagion despite a victory for pro-bailout parties in the Greek election.

Markets were initially optimistic on news Greece's center-right New Democracy party will try to form a coalition with other parties and Germany indicated it may be willing to grant the fiscally troubled nation more time to meet fiscal targets needed to avoid a euro exit.

New Democracy leader Antonis Samaras said Greece will meet its financial commitments but indicated some adjustments to the bailout agreement need to be made.

But the election results offered little reprieve from contagion concerns as yields on both Italian and Spanish bonds rose, with Spain's 10-year bond yield climbing above the 7 percent level viewed as unsustainable by many analysts.

"(Samaras) is not going to rip up the bailout but he is going to ... look to renegotiate the terms, try to make them a little less onerous while still honoring them," said Ken Polcari, managing director, ICAP Equities in New York.

"So in that sense, what has really changed - nothing - so the focus goes right back to Spain as the fear continues."

The rising yields prompted Spain's treasury minister to urge the European Central Bank to make a firm response to market pressures.

Banking shares, seen as particularly sensitive to euro zone troubles, lost ground. JP Morgan Chase & Co was off 1.4 percent to $34.55 and Citigroup Inc was down 2.2 percent at $27.69. The S&P financial index <.GSPF> shed 0.7 percent.

The NAHB/Wells Fargo Housing Market index rose one point from the month before to 29, its highest level in five years, but still well below 50 needed to indicate a favorable view.

European shares erased early gains and turned negative, with the FTSEurofirst 300 index <.FTEU3> down 0.1 percent.

World leaders are expected to put pressure on Europe at the G20 summit on Monday to outline a lasting strategy to save the euro currency and end financial turmoil.

The Dow Jones industrial average <.DJI> dropped 47.07 points, or 0.37 percent, to 12,720.10. The Standard & Poor's 500 Index <.SPX> lost 4.87 points, or 0.36 percent, to 1,337.97. The Nasdaq Composite Index <.IXIC> fell 8.68 points, or 0.30 percent, to 2,864.12.

Microsoft Corp is close to buying business software company Yammer Inc for more than $1 billion, according to a source familiar with the details. Shares fell 0.7 percent to $29.81.

Petsmart Inc said it has increased its quarterly dividend to 16.5 cents a share and authorized a new $525 million share buyback plan. Shares advanced 1 percent to $67.28.

DSW Inc plunged 9.4 percent to $53.30 in premarket trade after the footwear retailer gave guidance for its second-quarter and full-year earnings.

The economic calendar is light, with the National Association of Home Builders/Wells Fargo June housing market index due at 10 a.m. (1400 GMT).

(Reporting By Chuck Mikolajczak, editing by Dave Zimmerman)

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