Monday Selloff: Dow Tumbles 200, S&P Breaks Below 1500 on Italy Election Worries; Vix Soars 35%

Stocks kicked off the week with a big thud with all three major indexes dropping more than 1 percent across the board as investors remained concerned over Italy's election results. The S&P 500 broke below 1,500 and the Dow declined more than 200 points, retreating from its fresh multi-year high.

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S&P 500

The Dow Jones Industrial Average tumbled 216.40 points, or 1.55 percent, to close at 13,784.17, shortly after hitting a fresh multi-year high earlier in the session, dragged by Bank of America and Caterpillar. The blue-chip index slumped 154 points just in the final hour of trading. Earlier, the index was within less than 100 points of an all-time closing peak before retreating.

The S&P 500 slumped 27.75 points, or 1.83 percent, to finish at 1,487.85. And the Nasdaq dropped 45.57 points, or 1.44 percent, to end at 3,116.25. Both the Dow and S&P logged their worst one-day drop this year.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 30 percent to trade near 19, its biggest one-day percentage gain since last November.

All key S&P sectors finished firmly in the red, led by financials and energy.

European shares quickly cut their earlier gains to end mixed after a projection by Italian TV showed the center-right party, led by former leader Silvio Berlusconi, leading in elections for the Senate vote. Meanwhile, Italian state TV station RAI said none of the four main groups running in the Italian parliamentary election is likely to win a majority in the Senate. A coalition or party must win at least 158 of the 315 Senate seats to gain a majority in the upper house, which a government would need to pass legislation.

Investors have been closely watching the outcome of the Italian election as the government's decision over the next few months could influence whether Europe can stem its financial crisis. Italy is the euro zone's third largest economy.

The euro continued to weaken against the U.S. greenback, falling below $1.31 for the firs time since January 10.

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Among earnings, home improvement retailer Lowe's posted earnings and revenue that topped Wall Street expectations, as sales benefited from rebuilding after super storm Sandy. However, the company's outlook disappointed analysts.

Hertz posted a quarterly loss, hurt by to costs related to its acquisition of rival Dollar Thrifty, but shares still rallied after the car rental company's adjusted earnings still topped expectations. In addition, the firm said it expects to see strong results for 2013 on higher pricing.

Caesar's Entertainment and Autodesk are among notable companies schedule to report quarterly results after the closing bell.

Barnes & Noble soared after the bookstore chain's Chairman Leonard Riggio said he plans to purchase the retail assets of the company, according to a filing. Barnes & Noble said it has set up a committee of three independent directors to evaluate Riggio's proposal. The company is scheduled to report earnings results on Thursday.

Microsoft was in focus after Stifel Nicolaus suggested the computer giant should split into two firms, with one focused on software and the other on devices. The tech giant's stock was in the red, along with the broader market.

Also among techs, Zynga gained after the social gaming company said it is cutting about 1 percent of its staff and consolidating a handful of offices across the nation in a cost-cutting move.

Meanwhile, Congress reconvenes to decide on the $85 billion in automatic spending cuts due to take effect on March 1. Wall Street analysts say it is increasingly unlikely that Democrats and Republicans will agree to a deal on the sequestration issue this week. (CNBC Explains: Sequester)

"A major effort to short-circuit the cuts does not seem in train for the coming week," wrote Michael Moran, chief economist at Daiwa Capital Markets America.

However, Moran said commentators were exaggerating the negative impact of the sequester, with potential cuts to big-ticket items being spread over several years, rather than undertaken immediately.

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Treasury prices held gains after the government auctioned $35 billion in 2-year notes at a high yield of 0.257 percent. The bid-to-cover ratio, an indicator of demand, was 3.33.

Federal Reserve Chairman Ben Bernanke is expected to deliver his semiannual testimony on monetary policy to the Senate Banking Committee on Tuesday, followed by an appearance before the House Financial Services Committee on Wednesday. Traders say leaked reports that Bernanke has downplayed worries that quantitative easing is spawning asset bubbles helped lift markets last week.

Moody's Investors Service downgraded U.K.'s triple-A credit rating on Friday due to weakness in the country's medium-term growth outlook and an increasing debt burden. Britain's finance minister, George Osborne, said the downgrade would not change his austerity program, which has been blamed in some quarters for the country's weak growth outlook. (Read More: Is the UK the New 'Problem Child' of Europe?)

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Coming Up This Week:

TUESDAY: FHFA housing price index, S&P Case-Shiller home price index, new home sales, Richmond Fed manufacturing index, Ben Bernanke speaks, 5-yr note auction, JPMorgan Chase investor day; Earnings from Home Depot, AutoZone, Macy's, Saks,, TiVo
WEDNESDAY: Weekly mortgage applications, durable goods orders, Ben Bernake speaks, pending home sales, oil inventories, 7-yr note auction, Apple shareholders mtg, Coinstar shareholders mtg; Earnings from Target, Dollar Tree, TJX, Groupon, JCPenney, Limited Brands, Monster Beverage
THURSDAY: GDP, jobless claims, Chicago PMI, natural gas inventories, Fed's Raskin speaks, Farm Prices, Fed's Fisher speaks, Fed's Evans speaks, Oppenheimer investor mtg; Earnings from Best Buy, Kohl's, Sears, Barnes & Noble, Gap,
FRIDAY: Personal income & outlays, PMI manufacturing index, consumer sentiment, ISM mfg index, construction spending, Ben Bernake speaks, auto sales; Earnings from Foster Wheeler

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