NEW YORK ( TheStreet) -- Europe's exposure to Italian debt had investors fearing that more countries will be dragged into a fiscal crisis as a lack of clear direction from the European Union upset stock markets worldwide on Monday.

European officials have yet to show a coherent strategy with how to deal with the debt situation, said Lee Cohen, head of government trading and finance at Oppenheimer. Uncertainty over budget issues worldwide has meant that a global financial crisis stands between simmering and boiling, said Cohen.

On Monday, U.S. stocks lost more than 1%, with the Dow falling 1.2% to 12,505. The S&P 500 lost 2% to 1320, and the Nasdaq finished 2% lower at 2803.

The market followed overseas indices lower, with the FTSE in London finishing down 1%, and the DAX in Frankfurt plunging 2.3%. Hong Kong's Hang Seng sunk 1.7%, and Japan's Nikkei lost 0.7%.

European leaders met to discuss additional financial support for Greece, but market watchers were already eyeing Italy and Spain as the next eurozone countries in need of bailouts. Italian and Spanish bond yields rose to their highest levels on Monday since the creation of the euro, according to a Wall Street Journal report.

The euro settled 1.6% lower against the greenback, which traded 1% higher against a basket of currencies.

News from China also worried investors as data released Saturday showed that inflation in the country had risen to a three-year high in June despite repeated attempts by China's central bank to rein in an overheated economy.

Meanwhile, U.S. debt talks are still in progress, with President Obama vowing this morning to meet with legislators every day to come to an agreement on reducing the deficit. The equity market by large has not reflected fears that analysts could downgrade the country's credit rating, as most investors believe the U.S. will come to a resolution ahead of the Aug 2 deadline to raise the debt ceiling.

Kicking off the earnings season, Alcoa ( AA) reported earnings of 32 cents per share, about in line with analysts' estimations. The company's stock gained 0.5% in afterhours trading.

"The economy is in a Catch-22," said Paul Nolte, managing director of Dearborn Partners, in a recent note. "Companies are not sure modestly higher demand will persist, so why hire additional staff -- and existing staff are concerned their job may not be around too much longer. So both play a cautious game, spending only what is needed."

Conglomerate and financial stocks put in the weakest performance of the session. Financials were down 3% today, so we know that the poorly performing market has less to do with problems in the U.S. debt situation and jobs market and more to do with fears of exposure to Italian debt, said Sam Stovall, S&P chief investment strategist.

All 30 Dow Jones Industrial Average components finished in negative territory, with Hewlett-Packard ( HP), Bank of America ( BAC) and JPMorgan Chase ( JPM) posting the largest drops. Wal-Mart ( WMT), Procter & Gamble ( PG) and McDonald's ( MCD) recorded the mildest losses on the Dow.

Market breadth was decidedly negative, with 96% of the 3.5 billion shares trading on the New York Stock Exchange posting losses while only 4% were rising. Some 1.8 billion shares changed hands on the Nasdaq.

In merger news, International Paper ( IP) announced a tender offer for Temple-Inland ( TIN) of $30.60 per share in cash, a 46% premium to where Temple's shares traded at before the first unsolicited bid in June. The target's stock rose 0.5% to $30.70 after the market close.

Shares of Arch Chemicals ( ARJ) surged 12% to $47.04 on news that Swiss company Lonza agreed to buy it for $1.2 billion in cash, creating the world's largest microbial control business.

Australian mining company Macarthur Coal said it received a takeover proposal from Peabody Energy ( BTU) and ArcelorMittal ( MT) valued at roughly $5 billion. Macarthur is the world's largest producer of pulverized coal product that is used to make steel. Peabody's stock was losing 3.4% at $57.94 and shares of ArcelorMittal dropped 3.8% to $33.09.

Shares of News Corp. ( NWSA) slipped 7% to $15.59 as U.K. competition regulators prepared to review the media company's 7.8 billion-pound ($12.4 billion) offer to take complete control of the British Sky Broadcasting Group amid investigations into a phone-hacking scandal at News Corp'.s now-defunct tabloid, News of the World.

Car-rental company Hertz ( HTZ) is extending its more than $2 billion offer for rival Dollar Thrifty ( DTG) to Aug. 5, from its initially announced expiration date of July 8. The bid consists of $57.60 in cash and 0.8546 a share of Hertz common stock. Hertz's stock traded 3.8% lower at $15.65 and shares of Dollar Thrifty shed 0.4% at $73.64.

Dunkin Brands said it plans to sell 22.25 million common shares at an estimated price of $16 to $18 a share in its initial public offering, according to a Securities and Exchange Commission filing. The operator of the Dunkin' Donuts coffee chain has applied to have its shares listed on the Nasdaq under symbol "DNKN."

The August crude oil contract shed $1.21 to trade at $94.99 a barrel. Gold for August delivery was up by $7 at $1,549 an ounce.

Treasury yields suffered from fears of a euro debt contagion with the benchmark 10-year Treasury rising 26/32, diluting the yield to 2.933%.


-- Written by Chao Deng and Melinda Peer in New York.

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