NEW YORK — Fear that Spain may need a government bailout sent its borrowing costs soaring, the euro to a two-year low against the dollar and stocks around the world sharply lower as investors pulled back Monday from all manner of risk.
The Dow Jones industrial average was down 149 points to 12,674 at 12:10 EDT. Yields for U.S. government bonds sank to record lows as traders sought the safety of American debt.
Borrowing costs rose sharply for Spain and Italy after news the Spanish economy contracted by a quarterly rate of 0.4 percent in the second quarter. Falling economic output makes it more difficult for Spain to deal with its debts.
The Standard & Poor's 500 index fell 18 points to 1,344. The Nasdaq composite index plunged 52 points to 2,873.
"Increases in Spanish borrowing costs have brought back questions about the health of Europe," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "That's driven a flight to safety."
The Dow was down as much as 239 points shortly after the opening but started rising after an hour of trading. The Dow has had only seven declines of 150 points or more this year, including its worst, a 274-point drop on June 1.
The selling was widespread. All 10 industry groups within the S&P 500 were down, with energy companies off more than 2 percent.
Spanish banks have already received international aid. Now fears are growing that the government itself will need help.
Adding to jitters was news last week that an eastern region of Spain was asking for a bailout from government in Madrid. Then, over the weekend, a southern region said it might also need help.
Spain's market regulator said it was temporarily banning short-selling of shares on its stock indexes. In a short sale, an investor seeks a profit by betting that the price of a certain stock will fall.
Strong selling rattled European markets. The main stock index dropped more than 7 percent in Greece, 1 percent in Spain, 3 percent in Germany and France. Asian stocks were also sharply lower.
Bank stocks, which tend to take a hit when fear flares in Europe, were among the biggest losers. Citigroup stock dropped more than 2 percent and Bank of America 1.3 percent.
The price of oil fell 2.7 percent to less than $90 per barrel. Exxon Mobil declined $1.25, or 1.5 percent, to $84.71.
The euro slipped just below $1.21 against the dollar, its lowest reading since June 2010.
There were also signs that a global economic slowdown is hitting U.S. companies that rode out the recession fairly well, largely because currencies overseas have tumbled against the dollar.
While global sales at McDonald's restaurants open at least a year rose 3.7 percent, profits slid by about the same rates due to currency exchange. McDonald's generates about two-thirds of its revenue outside the U.S.
"A disproportionately large amount of revenue overseas is seen as a negative today," said Lawrence Creatura, a portfolio manager at Federated Investors, a mutual fund firm. "The list of weakening overseas markets is getting longer by the day."
Stock in the world's largest hamburger chain slid 3 percent after the company fell short of most Wall Street expectations for both net income and revenue.
Hasbro, the toy maker, said international revenue in the second quarter fell 4 percent. Taking out the impact of the stronger dollar, however, international revenue gained 5 percent. But the company, whose products include Monopoly and Scrabble, beat analyst estimates of net income, thanks partly to cost cutting.
Its stock rose $1.26, or 3.7 percent, to $35.10.
A forecast from a Chinese central bank adviser that China's economy could grow at a slower pace in the third quarter deepened concerns about the global slowdown.
One big winner so far is RailAmerica Inc., a short-line railroad operator. It rose 10 percent to $27.29 after announcing that it had agreed to be bought by another short-line operator, Genesee & Wyoming, for $1.39 billion in cash.