Wall Street slumps as Europe worries grow

NEW YORK (Reuters) - U.S. stocks fell more than 1 percent on Wednesday as mounting fears about the euro zone prompted investors to sell sectors tied to economic growth.

The region's debt woes sent investors fleeing to safe havens, like the 10-year U.S. Treasury note, whose yield fell to the lowest in 60 years. The euro, meanwhile, slid to its lowest against the U.S. dollar in 23 months. U.S. stocks have been closely tethered to the euro's fortunes, with a 50-day correlation between the currency and the S&P 500 index at 0.91.

Yields on 10-year Spanish bonds moved closer to 7 percent, a level at which other euro zone members were forced to seek a bailout.

Spain is expected to issue new bonds to fund its troubled banks and troubled regions despite increased borrowing costs.

Adding to the concern, Italian 10-year yields topped 6 percent for the first time since January at a bond sale, raising concerns the region is vulnerable to contagion. European shares ended 1.5 percent lower.

"We're being held hostage by Europe, by the increasing tensions in Spain," said John Kattar, chief investment officer at Eastern Investment Advisors in Boston, which manages $1.7 billion. "We're back to a risk-off mode, with cyclical sectors getting hit really hard."

The Dow Jones industrial average <.DJI> was down 158.18 points, or 1.26 percent, at 12,422.51. The Standard & Poor's 500 Index <.SPX> was down 18.99 points, or 1.43 percent, at 1,313.43. The Nasdaq Composite Index <.IXIC> was down 40.20 points, or 1.40 percent, at 2,830.79.

All 10 S&P 500 sectors fell, with energy <.GSPE> the biggest decliner of the day. The group tumbled 2.9 percent alongside a drop in crude oil prices, and consumer discretionary stocks <.GSPD> were off 1.7 percent.

The PHLX oil service sector <.OSX> dropped 3.8 percent while crude fell 3.3 percent. Halliburton Co dropped 4.5 percent to $30.56. The CBOE Volatility index <.VIX> jumped more than 12 percent, the biggest spike for the "fear index" since mid-April.

Many analysts view next month's parliamentary election in Greece as key to whether the country stays in the euro zone. Polls showed on Wednesday that parties for and against a bailout were neck-and-neck or very close to each another.

U.S. economic data showed contracts to purchase previously owned U.S. homes unexpectedly fell 5.5 percent in April to a four-month low, dealing a blow to optimism the housing sector may have hit a bottom.

U.S. shares of Research In Motion Ltd tumbled 7.6 percent to $10.37 as the biggest percentage decline on the Nasdaq 100 <.NDX> index. The company hired bankers for a far-reaching strategic review and to look for partnerships as the BlackBerry maker warned it would likely report a quarterly operating loss.

Apple Inc slipped 0.2 percent to $570.81 after Chief Executive Tim Cook, speaking at the All Things Digital conference, said technology for televisions was of "intense interest" but stressed the company's efforts would unfold gradually.

Macy's Inc said May same-store sales were better than expected, helped by growing e-commerce business, but shares slipped 1.7 percent to $38.34.

Pep Boys-Manny, Moe & Jack plunged 21 percent to $8.73 after the automotive parts and service chain said the sale of the company to private equity firm Gores Group has been called off.

(Editing by Kenneth Barry)

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