Greek Fears Send Stocks to Three-Month Low

U.S. stocks tumbled as fears of contagion around a Greek default picked up, adding more pessimism to a foreboding mix of U.S. economic data.

A market rally ends as turmoil in Greece dampens outlooks. Plus, Pandora shines on its opening day, a look at what the Fed is planning, and why investors should take a look at equities.

The Dow Jones Industrial Average sank 178.84 points, or 1.48%, to 11897.27, a new three-month low that wiped out the week's gains.

The Standard & Poor's 500-stock index fell 22.45 points, or 1.74%, to 1265.42 and the Nasdaq Composite shed 47.26 points, or 1.76%, to 2631.49.

The declines were broad-based. All 30 of the Dow components and all 10 sectors of the S&P 500 finished lower. Only 13 of the S&P 500 companies bucked the trend with modest gains.

After the selloff, all three major indexes are down for the week—putting the U.S. stock markets on track for their first seven-week slide since 2001.

Greek fears intensified after euro-zone officials failed to make progress on discussions about Greek aid and protests against austerity measures turned violent in Athens. Greek bonds were pummeled, sending yields to their highest levels since the inception of the euro.

In a reflection of the fears gripping investors, the CBOE Market Volatility Index, the "fear gauge" known as the VIX surged 16%. The VIX has jumped 37% this month.

Greek Prime Minister George Papandreou said he will form a new government Thursday and seek a vote of confidence from his parliamentary group after talks with opposition failed to form a unity government.

Amid the concerns about Greece, the euro sank more than two cents, to $1.4165, from $1.4440 late Tuesday in New York, while the yield on the benchmark 10-year Treasury note fell to 2.9733% from 3.097%. Yields fall when prices rise.

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U.S. stocks tumbled as fears of contagion around a Greek default picked up.

"The stock market doesn't like rioting—it never does and it never will," said Jeffrey Friedman, senior market strategist at Lind-Waldock, a division of MF Global. "The guys with the cigars say, 'I don't like this. This is making me uncomfortable. It's time to get to the sidelines.' "

The European Central Bank warned that contagion from the euro zone's debt crisis remains the top risk to financial stability in the common-currency bloc, while reiterating its opposition to a Greek debt restructuring. Separately, the Irish Budget Minister warned of more budget cuts.

Jonathan Golub, chief U.S. equity strategist at UBS, said the market has been anticipating a Greek default. "The market knows that it's going to occur, and when it does, the market will be temporarily disrupted, but the market is pricing that in right now."

The declines were led by materials and energy stocks, as crude-oil futures sustained their biggest one-day drop in more than a month, tumbling 4.6% to settle below $95 a barrel.

Alcoa shed 2.9% to lead the Dow decliners, while oil giants Chevron and Exxon Mobil fell 2.2% and 2.1%, respectively. Banks were also weak, with Bank of America down 2.8% and J.P. Morgan Chase off 2.2%. Defensive sectors, including utilities, telecommunications and health care, were the three strongest performers.

Also driving stocks lower were more gloomy snapshots on the domestic economy. A reading of the Federal Reserve Bank of New York's Empire State Manufacturing Survey fell below zero for the first time since last November, dropping 20 points from May to -7.79. The index dramatically disappointed economists' expectations of a reading of 12.

Meanwhile, consumer prices rose 0.2%, following a 0.4% increase in April. More disconcertingly, so-called "core inflation," which strips out energy and food costs, rose by a monthly 0.3% in May, the biggest jump in three years. Economists had forecast a 0.1% rise in overall prices, and a 0.2% gain for core inflation.

"The inflation gremlins are still alive, and when we look at core inflation, that really does seem to be an ongoing concern to investors," said Larry Glazer, portfolio manager at Mayflower Investments in Boston. He called the day's mix of economic readings "a really bad combination of events."

More

VIX Jumps to Three-Month High

New York Manufacturing Deteriorates

Core Inflation Moves Higher

MarketBeat: Financials Fully Confirm the Downturn

Other data showed that industrial production remained weak, with only a slight increase due to a continued fall in automobile manufacturing after the earthquake in Japan hit global supply chains.

U.S. home builders' confidence also fell this month to the lowest since last September, indicating that builders expect the weakening economy to further pull down their battered industry.

In Europe, the markets were broadly lower, with France's CAC 40 index falling 1.5% after Moody's Investors Service placed three large French banks under review for a possible downgrade, citing their exposure to Greece. Asian bourses were mixed, with Hong Kong and Shanghai shares falling while the Japanese market gained ground.

Among stocks, Pandora Media trimmed sharp gains of as much as 63% to finish 9% higher after the Internet radio company began trading Wednesday on 14.7 million shares at $16 each.

Owens-Illinois fell 14% to lead S&P 500 decliners. The maker of glass containers said its second-quarter adjusted earnings will decline from a year earlier, due to higher-than-anticipated increases in manufacturing and delivery costs.

Write to Jonathan Cheng at jonathan.cheng@dowjones.com

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