) -- Stocks were diving into the close on heightened eurozone debt contagion fears.


Dow Jones Industrial Average

was down 160 points, or 1.3%, to 11,936. The index, which has finished up three of the last four trading sessions, tacked on 17 points on Tuesday amid light trading volumes. The


was off 39 points, or 1.5%, at 2,647. The

S&P 500

was last down 18 points, or 1.5%, at 1240.

"Stocks are selling off suddenly on Fitch saying that US Bank ratings are threatened by eurozone contagion," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. This is "causing this spike lower."

"Just like the movie Ground Hog Day, the market is stuck in a repetitive loop. Volume continues to be very light in the stock market, which remains vulnerable to news out of Europe. As a result it appears that few traders are willing to commit to a market opinion for very long. As has been the case frequently of late there is a strong correlation between the dollar/euro and the S&P, with the currency moves leading the way and the stocks dutifully following along, on an intra-day basis," said Lou Brien, a market strategist at DRW Trading.

"The S&P is meeting various levels of resistance, so the market has been stalling the last week and a half" said Ryan Detrick, technical strategist with Schaeffer's Investment Research. Detrick explained that the index has been dancing around 1260, a key technical support level. He also noted that the S&P 500 is trading just below its year-to-date breakeven level of 1257, as well as below its 200-day moving average of 1270. Analysts consider a break above the average as a bullish sign.

With the European Central Bank still refusing to act as a lender of last resort, contagion in Europe's bond market threatens to engulf the eurozone's largest economies. Yields on Italian 10-year bonds were back above 7% after an intervention by the European Central Bank to buy up sovereign debt pushed yields briefly below the key threshold in the morning.

Investors are nervous that the debt crisis has entered a new, more dire stage given the rising borrowing costs in France and Spain. A downgrade of France, which currently holds a triple A credit rating, would further erode the market's confidence in Europe's emergency rescue fund.

Meanwhile, German Chancellor Angela Merkel reiterated on Wednesday that Germany will resist pressure for the central bank to take a bigger role in stemming the debt crisis. Also weighing down sentiment was a grim outlook for economic growth in the U.K. from the Bank of England. Bank of England Governor Mervyn King said Britain's economy could remain flat until mid-2012 and that he did not know how Europe would resolve its debt crisis. Bank of Japan Governor Masaaki Shirakawa said that Europe's woes are affecting emerging nations and Japan.

Signs that Italy is taking its debt problems more seriously did little to lift stocks. Italy's Mario Monti formed a new government on Wednesday, bringing the country closer to staving off a potential default. However, investors are hoping that Italy will show further political willpower than a shift in leadership.

On Wednesday, oil prices climbed back above $100 a barrel for the first time since early June. The December crude oil contract gained $3.22 to finish at $102.59 a barrel. In other commodities, gold for December delivery fell $7.90 to settle at $1,774.30 an ounce.

"Most of the talk today is about higher oil prices," said Detrick at Schaeffer's, adding that airline companies were facing pressure.

United Continental

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Delta Air Lines

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US Airways


were falling by 4.5%, 3.1% and 3.8%, respectively

Better than expected economic data out of the U.S. kept losses in check, as did a

Dow Jones

report that said that Federal Reserve Bank of Boston president Eric Rosengren indicated that there could be some coordinated efforts between the U.S. and European central bankers to ensure that the global markets remain liquid as Europe's debt crisis continues.

Industrial production rose 0.7% in October, the

Federal Reserve

said Wednesday. The reading was better than the 0.4% increase analysts expected, although the previous month's production figure was revised from a 0.2% gain to a 0.1% decline. Capacity utilization came in at 77.8%, slightly higher than forecast and up from 77.4% in the prior month.

Confidence amongst U.S. home builders rose in November, according to the National Association of Home Builders' housing market index, which rose to a level of 20 in November. The reading, although still low, was the best since May of 2010 and surpassed the consensus forecast for the level to stick at 18.

The consumer price index edged down 0.1% in October, a welcome surprise given that economists expected the level to sit tight after increasing 0.3% in September. Excluding food and energy, inflation rose 0.1%, in line with expectations.

Signs of easing inflation may give the Federal Reserve more leeway to further stimulate the economy if needed. Market participants often meet the possibility with enthusiasm but as David Semmens, economist with Standard Chartered Bank, notes, "this is Fed friendly data but is going to do little to sway the market one way or the other right now given the focus on Europe."

"Good economic data, especially the 0.7% rise in industrial production, helped lift stocks on the back of a better domestic picture," said Cantor's Pado. But "heading into the end of the day, we fade on fear that we'll have to live through another negative open tomorrow."

European stocks closed lower with London's FTSE off 0.15% and Germany's DAX slipping 0.33%. Overnight, Asian stocks fell for a second day. Japan's Nikkei Average lost 0.92% and Hong Kong's Hang Seng closed down 2%.

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The euro was falling to a five-week low against the dollar which was strengthening by 0.2% compared to a basket of currencies. In the bond market, 10-year Treasuries were adding 8/32, diluting the yield to 2.021%.

-- Written by Andrea Tse and Chao Deng in New York