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Dow Drops 199 as Germany Rejects New Rescue Plan

NEW YORK ( TheStreet) -- The major U.S. stock indices saw a selloff accelerate into the market close after Germany reportedly rejected parts of a European Union draft of solutions for the Continent's debt crisis.

The Dow Jones Industrial Average dropped 199 points, or 1.6%, to finish at 11,998. The S&P 500 was down 27 points, or 2.1%, at 1234, and the Nasdaq was off 53 points, or 2%, at 2596.

The draft, obtained by Reuters, proposed introducing the region's permanent European Stability Mechanism in July 2012, a year earlier than proposed; giving the facility a banking license; and having it run alongside the existing European Financial Stability Facility fund, which was supposed to be have been temporary.

The draft said the ESM would have a capacity of 500 billion euros, according to Reuters.

Germany rejected the proposal to give the European Stability Mechanism a banking license and issuing common eurozone debt, Reuters reported, citing a senior German source.

The European Banking Authority said today that European banks must raise $154 billion in new capital by June 2012. Spain and Italy are the most capital-deficient and need to raise more than 26 billion and 15 billion euros, respectively. The largest banks in Germany face a 13 billion-euro shortfall, all the more reason for the ECB to try to restore confidence in the banking industry.

Comments from European Central Bank President Mario Draghi had sent stock futures falling early Thursday. Draghi announced that the ECB would ease collateral requirements and provide banks with three-year loans for the first time, starting later this month. However, he hinted that the bank would not embark on quantitative easing, saying that "we have a treaty that bans monetary financing." He also dampened hopes that the bank would undertake aggressive bond buying to suppress soaring sovereign bond yields in the eurozone.

"Draghi essentially said his hands are tied," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "I think he's holding back until the broader meeting between eurozone leaders this week. He's really putting the pressure on politicians to figure it out."

Investors are now watching what may come out of the summit in Brussels that kicks off today and extends into Friday. Meanwhile, rumors about potential plans for Europe's rescue fund and how politicians will bring about tighter unity among euro nations continue to swirl.
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