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Wednesday, Dec 28, 2011 4:40 PM UTC

Stocks Slide On Signs Of Jitters At European Banks

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Topics: From the Wires,

NEW YORK (AP) — Stocks fell Wednesday after Europe’s central bank reported that its overnight deposits hit another record, the latest indication of worry among European lenders.

The Dow Jones industrial average lost 110 points in afternoon trading, and the Standard & Poor’s 500 index fell after five days of gains.

The European Central Bank said the continent’s banks parked a record $590.72 billion with it overnight. That means those banks are less willing to take the risk of making short-term loans to each other, opting instead to earn low interest rates from the ECB. The disclosure also hurt the euro, which fell over 1 percent against the dollar, to $1.29.

The worrying news from the ECB overshadowed two successful auctions of Italian government debt. Italy was able to pay much lower borrowing rates than it did in auctions last month. The strong demand from investors raised hopes that Italy would be able to avoid sinking into a financial crisis, as smaller countries like Greece and Portugal have.

John Merrill, chief investment officer at Tanglewood Wealth Management, said markets would remain vulnerable to flare-ups in Europe’s long-running financial crisis until leaders there come up with more convincing solutions for paying down their enormous debt loads and keeping the 17-nation currency union intact.

“We live in a Band-Aid world,” Merrill said. “Nobody really is addressing underlying issues.”

European leaders agreed at a summit Dec. 9 to forge closer fiscal ties over the long term, but investors are still worried that Greece might default on its debt or be forced to leave the euro bloc. A Greek exit from the currency union would likely cause huge disruptions for the country’s economy and losses for European banks that hold Greek government debt. Investors fear that could cascade into another global financial panic, as happened in 2008 following the collapse of the U.S. investment bank Lehman Brothers.

The Dow Jones industrial average fell 111 points, or 0.9 percent, to 12,180 as of 1:50 p.m. Eastern. Materials and energy companies were leading the declines. Alcoa Inc. fell 2.7 percent and Caterpillar Inc. fell 1.8 percent. AT&T Inc. edged up 0.1 percent, was the only one of the 30 stocks in the Dow average that rose.

Trading was very quiet in a holiday-shortened week. Markets were closed Monday in observance of Christmas. The Dow closed 2 points lower Tuesday.

The S&P 500 fell 12 points, or 1 percent, to 1,253. It was the first decline for the S&P index after five days of gains, and turned the index negative for the year. The Nasdaq composite declined 25 points, or 1 percent, to 2,599.

The Bank of Italy raised $11.8 billion in two bond auctions, reflecting investor approval of the country’s recently passed austerity measures. The yield on Italy’s six-month bill offering was half the interest rate the country paid in a similar auction last month. The yield on the country’s 10-year bond remained dangerously high, however, at 6.93 percent. It had risen to 7 percent Tuesday, a level that is considered unsustainable.

Italy is the euro zone’s third-largest economy and is considered too big to save under the euro zone’s current bailout funds. Investors have grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around $2.5 trillion.

The worries were reflected in U.S. bank stocks. Bank of America Corp. fell 3 percent, while Regions Financial Corp. fell 3 percent.

In other corporate news:

— Sandridge Energy Inc. stock is down over 3 percent on news that it is selling drilling rights in two states to a Spanish energy company, Repsol YPF.

— Cavium Inc. fell 2 percent, a day after the chipmaker said its fourth-quarter results will fall below its previous forecast.

More Pallavi Gogoi.

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