Stocks End Down Over 3% on Euro Zone Fears

Stocks plunged sharply to log their worst day in six weeks Wednesday as investors were rattled by fears over the euro zone crisis.

The Dow Jones Industrial Average tumbled 389.24 points, or 3.20 percent, to close at 11,780.94, led by BofA and JPMorgan .

The S&P 500 dropped 46.82 points, or 3.67 percent, to finish at 1,229.10. The Nasdaq slumped 105.84 points, or 3.88 percent, to end at 2,621.65.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged more than 30 percent to close above 36.

All 10 S&P sectors closed firmly in negative territory, led by banks and materials.

Stocks slumped further after the Greek President called for a meeting of political leaders on Thursday after the nation’s two main political parties failed to agree on who will lead the country’s interim government.

Earlier, Reuters reported that Greek party leaders had agreed on house speaker Filippos Petsalnikos to head Greece’s new coalition government, but the decision may have been withdrawn.

In addition, EU officials said they have no plans in place for a financial rescue of Italy, and adding the euro zone was not even considering extending a precautionary credit line to Rome.

“The problem is, we’ve reached the domino phase, so it’s not about Greece anymore—it’s Italy and if Italy has a problem, then France has a problem too,” said Brian Battle, vice president of trading at Performance Trust Capital Partners. “The hope that there would be a solution is now non-existent.”

Italian borrowing costs reached a breaking point, closed over 7 percent, a level that previously drove other euro zone nations such as Greece and Portugal out of credit markets and forced those countries to seek bailouts from external assistance from the EU and IMF. However, most strategists worry that Italy is too large to bail out.

Concerns over Italy overshadowed gains in the previous sessionafter Italian Prime Minister Silvio Berlusconi announced he would resignonce a series of austerity measures had been put in place.

Christine Lagarde, head of the IMF, warned Europe's debt crisis risked plunging the global economy into a "lost decade,"and said it was up to rich nations to shoulder the burden of restoring growth and confidence.

“What concerns us is the volatility since mid-August starting with issues in Greece…this is going to be almost a two-year process in the EU,” said Tim Speiss, partner-in-charge of EisnerAmper's Personal Wealth Advisors Group. “Germany, France and the rest of the euro zone countries are not going to let these countries off the hook. For them to get continued funding, they are going to have to demonstrate that they are trying to pass austerity measures.”

On the earnings front, GM posted a better-than-expected profitas the automaker gained market share in North American and Asian markets. However, shares tumbled with the broader market.

Macy's reported results that beat estimates and also raised its full-year outlook, but shares declined after the retailer offered cautious guidance for the current quarter.

HSBC slumped after the financial giant cited a "very challenging" outlookfor the global economy and posted a 36 percent plunge in underlying profits, due to lower investment banking income and a gain in bad debts in the U.S.

Cisco and Green Mountain are scheduled to report earnings after-the-bell tonight.

Adobe Systems tumbled after the tech firm said it is planning to lay off 750 employees and take a charge of up to $94 million as part of a restructuring initiative.

Best Buy was the only stock to finish in positive territory on the S&P 500 after Goldman Sachs raised its EPS estimates on the electronics retailer.

Treasurys pared their gainsafter the government auctioned $24 billion in 10-year notes at a high yield of 2.03 percent and bid-to-cover of 2.64.

On the economic front, U.S. wholesale inventories fell in September for the first time since late 2009, according to the Commerce Department.

And weekly mortgage applications jumped last week, according to the Mortgage Bankers Association, thanks to increased refinancing demand as interest rates dropped.

Meanwhile, China's annual inflation rate fell sharply in October in a further pullback from July's three-year peak.

—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC

On Tap This Week:

THURSDAY: International trade, jobless claims, import & export prices, 30-yr bond auction, MF Global bankruptcy proceedings; Earnings from Kohl's, Disney, Nordstrom, Nvidia
FRIDAY: US Holiday—Veteran's Day. Markets open, banks closed. Consumer sentiment, French short sale ban ends

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