Dow Finishes Down 163, Nasdaq Drops 35

Stocks closed sharply lower Monday after two big rating agencies criticized a fiscal pact between European leaders last week that is aimed at easing the region’s debt crisis.

Fitch Ratings said the deal to bind Europe’s budgets more closely will make little difference. The region will face “a significant economic downturn” as it wrestles with its sovereign debt crisis for another year or more, Fitch predicted. Moody’s said the summit produced “few new measures.”

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said the agreement “kicks off a process that has a chance of solving the next crisis, not this one… The problem is the changes they’ve agreed to go toward solving the root of current problems 12 months from now.”

The euro hit a 10-week low against the dollar, plunging nearly 2 cents. Yields on Italian bonds rose as investors fretted about that nation’s debt burden. European stocks fell. Treasury yields fell as investors shifted money into U.S. government debt.

Stocks fell broadly, with declines across all 10 industry groups in the Standard & Poor’s 500 index. Falling stocks outnumbered rising ones four-to-one on the New York Stock Exchange.

Intel Corp. dragged the Dow Jones industrial average lower, falling 4 percent after the chipmaker said its fourth-quarter revenue will be lower than expected because of supply chain problems. Intel is considered a bellwether for the computer industry because its chips are used in a wide range of products.

The Dow closed down 162.87 points, or 1.3 percent, at 12,021.39. It was down as much as 243 points before rising in the final hour of trading. Monday’s loss erased nearly all of the Dow’s gains from last week.

The S&P 500 lost 18.72 points, or 1.5 percent, to close at 1,236.47. The Nasdaq composite index dropped 34.59, or 1.3 percent, to close at 2,612.26.

Moody’s Investors Service said earlier in the day that it will review the credit ratings of all European Union nations in the first quarter of next year. The statement doused optimism among investors that had lifted stocks and other risky investments late last week.

Moody’s said Europe remains in a “critical and volatile stage.” The pact, Moody’s noted, does not address Europe’s immediate problem: the crushing debt loads of some nations and their rising borrowing costs. Last week’s agreement calls for tougher fiscal discipline among European countries and a central authority with the ability to punish those that spend too much.

Financial stocks declined steeply. Investors fear that big banks might be damaged by the turmoil in Europe. Morgan Stanley fell 6.1 percent, Citigroup Inc. 5.4 percent. Bank of America Corp. and JPMorgan Chase & Co. posted the biggest and third-biggest losses in the Dow 30, falling 4.7 percent and 3.4 percent, respectively.

The yield on the 10-year Treasury note fell to 2.02 percent from 2.07 percent late Friday, indicating stronger demand for low-risk investments. Bond yields fall as demand for them increases.

Fears that Italy or Spain will default reduced demand for their government bonds, driving their yields higher and pushing their borrowing costs near the dangerous levels that forced Greece, Portugal and Ireland to take bailouts. The yield on the 10-year Italian bond rose to 6.53 percent. Greece and Portugal were forced to seek bailouts from their creditors when their bond yields approached 7 percent.

Stocks in Italy led European markets to a much lower close. Italy’s main index closed down 3.8 percent. Spain’s fell 3.1 percent, while Germany’s DAX lost 3.4 percent.

Among the top corporate movers:

– Endo Pharmaceuticals Holdings Inc. jumped 6 percent after federal regulators approved a new form of one of its pain medications, extending its patent rights over the drug.

– Diamond Foods Inc. plunged 22.8 percent after reports of an investigation of its payments to walnut farmers. Lawsuits already have been filed, and more are expected.

– Vulcan Materials Co. shot up 15.4 percent, the most in the S&P 500, after Martin Marietta Materials Inc. made an unsolicited bid to buy the company for $4.74 billion in stock. Martin Marietta rose 1.2 percent.

AP Business Writer Matthew Craft in New York contributed to this report.