Stocks Log Biggest Drop in 2012 on Greek Woes

Stocks closed sharply lower Tuesday, with the Dow posting its first triple-digit decline in 2012, fueled by fears over a Greek default and amid economic growth concerns.

S&P 500

The Dow Jones Industrial Average dropped 203.66 points, or 1.57 percent, to close at 12,759.15, logging its biggest decline since November 23, led by Caterpillar and Alcoa . Intel was the only gainer on the blue-chip index.

The Dow's recent streak without a triple-digit decline was the longest since 2006.

The S&P 500 erased 20.97 points, or 1.54 percent, to end at 1,343.36. The Nasdaq dropped 40.16 points, or 1.36 percent, to finish at 2,910.32. All 10 S&P sectors closed firmly in the red, led by financials and industrials.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged above 20 for the first time since mid-February. Meanwhile, open interest in the Vix index futures reached new all-time highs on Monday, hitting levels not seen since last June.

Global woes have weighed on equities in recent trading sessions. On Monday, stocks ended lowerafter China cut its 2012 growth target to an 8-year low of 7.5 percent.

The focus has since turned back to Greece as investors were jittery over the Greek debt swap deal. The bond swap plays an important role of a second bailout loan for the debt-ridden nation that aims to keep it from defaulting. European shares ended lower and gold prices dropped almost 2 percentas the euro slipped against the U.S. greenback.

Meanwhile, senior Greek finance ministry officials told CNBC the Private Sector Involvement (PSI) deal will be completed on time. The deadline is Thursday.

Earlier this week, a group representing private holders of Greek government bonds said a banks, insurers and investment funds including German insurer Allianz, French bank BNP Paribas, Germany's Commerzbank and Deutsche Bank are expected to participate in the swap.

“We have a risk-off trade going on because of the Greek situation…and the debt swap that’s coming up on Thursday night,” said Stephen Guilfoyle, trader at Meridian Equity Partners. “Greece is going to be in a situation where they may default and may drag the other PIIGS into it—bond yields were a bit volatile this morning for all the other PIIGS.”

Banks dropped heavily, with major financials Morgan Stanley and Citigroup briefly leading the S&P 500 laggards.

Many investors have been expecting stocks to take a breather, following the recent market rally that has sent major indexes to levels not seen since 2008.

“The market seems to have been looking for an excuse to take a correction,” said Telly Zachariades, partner at The Valence Group.

Interestingly, Zachariades noted that the chemicals space acts as a leading indicator and the sector currently points to a “global economy that is on the mend."

Meanwhile, investors have also been monitoring political tensions between Iran and Israel, which have propelled oil and gas prices higher in recent weeks. Oil eased slightlyin choppy trading.

President Obama said at a news conference he will "not countenance" Iran getting a nuclear weapon and signaled opportunities to settle the dispute diplomatically. This comes a day after Obama met with Israeli Prime Minister Benjamin Netanyahu.

Among techs Apple edged lower even after Barclays raised its target price on the iPad maker to $710 from $630. Investors and consumers are expecting the tech giant to unveil the iPad 3on Wednesday.

Google and Yahoo also slipped even after Nomura started coverage of the Internet companies with "buy" and "neutral" ratings and price targets of $750 and $13.50, respectively.

Skullcandy plunged after the headphone maker announced CFO Mitch Edwards has resigned.

Internet radio company Pandora is scheduled to post earnings after-the-bell tonight.

Merck slipped after the pharmaceutical giant said it sees first-quarter earnings below estimatesand warned that currency will negatively impact sales by 1-2 percent.

Consol Energy slumped after the coal producer said it will halt a mining unit at its southwest Virginia Buchanan mine, due to higher stockpile and a decline in international demand. Rival Peabody Energy also declined.

—Follow JeeYeon Park on Twitter: @JeeYeonParkCNBC

On Tap This Week:

WEDNESDAY: Weekly mortgage apps, Challenger job-cut report, ADP employment report, productivity & costs, oil inventories, consumer credit; Earnings from American Eagle, Hovnanian, H&R Block
THURSDAY: Jobless claims, quarterly services survey; Earnings from Smithfield Foods, Aeropostale
FRIDAY: Non-farm payrolls, international trade, wholesale trade; Earnings from Ann

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