Stocks, euro slide on sovereign risk concern

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Global stocks plunged and the euro hit an eight-month low against the dollar on Thursday as concern over Greece's fiscal woes spread to other highly indebted euro zone countries.

An intensified focus on sovereign credit and rising government deficits fueled widespread investor flight from risk, boosting US Treasuries and the Japanese yen as safe havens.

The European Union said on Wednesday that Greece's plans to cut its budget gap from 12.7% of gross domestic product in 2009 to below 3% in 2012 would not be easy to implement but vowed to hold Athens to its pledges. The persistent pall over Greece led investors to reduce risk elsewhere, especially in debt-burdened Spain and Portugal.

"This is a sovereign problem, and it's hitting everything," said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.

"If other European countries are having trouble like Greece, then it's a big problem for banks, and the banks are the foundation for everything. European banks will be in trouble and that will carry over to all stocks."

The euro fell more than 1% to USD 1.3739 after earlier hitting its lowest in more than eight months at USD 1.3729. The dollar rose 0.75% against a basket of major currencies but fell 2.2% against the yen, to 88.93 yen.

Political tension in Portugal over a regional spending bill and a climb-down by the Spanish government over pension reform added to the woes of peripheral euro zone states facing huge challenges to curb budget shortfalls.

Portuguese five-year credit default swaps hit a record high of 216,000 euros per 10 million euros of exposure, from 196,200 on Wednesday. Greek and Spanish CDS also rose.

Global stocks slumped as the rising dollar hurt commodities prices and a surprising rise in unemployment insurance claims underscored a slack US recovery.

First time jobless claims in the United States rose by 8,000 last week to 480,000, bucking the median forecast for a drop of 10,000. The weekly number is now the highest since mid-November and an ominous sign to what had been a positive trend since March.

The United States on Friday is likely to report businesses added 5,000 jobs in January, after a loss of 85,000 in December, according to the median forecast in a Reuters poll.

"The market significance of the January employment report has been significantly diminished by recent international economic developments, particularly the perceived heightening of sovereign default risks in Europe," Deutsche Bank economists said in a report.

The Dow Jones industrial average plunged 268.37 points, or 2.61%, to 10,002.18. The Standard & Poor's 500 Index fell 34.17 points, or 3.11%, to 1,063.11 and the Nasdaq Composite Index slid 65.48 points, or 2.99%, to 2,125.43.

US Steel Corp fell 5.9% to USD 44.07 as the stronger dollar weakened commodity prices. The S&P materials sector index dropped 3.8% to its lowest level since early November.

US light sweet crude oil fell USD 4.01, or 5.21%, to USD 72.97 per barrel, and spot gold prices rose 15 cents, or 0.01%, to USD 1063.20. The Reuters/Jefferies CRB Index declined 2.55%.

The MSCI world equity index fell 2.84%, its lowest since Nov. 4. It has lost more than 8% from Jan. 11, the peak of a 10-month, 80% rally. The pan-Europe FTSEurofirst 300 index lost 2.75%.

In Europe. Santander, the euro zone's biggest bank, lost more than 9% after traders pointed to concerns over the outlook for crisis-hit Spain and worries the bank is not doing enough to address its property exposure.

Japanese stocks fell 0.46% with Toyota Motor sliding further on its recall woes. Emerging stocks dropped 2.63%.

Demand for US Treasury debt pushed yields lower amid a retreat in global stocks and fears over potential defaults by European governments and Friday's labour report.

"It definitely gives more fuel to the rally" in Treasuries, said James Demasi, chief fixed-income strategist at Stifel Nicolaus & Co in Baltimore. "Over the course of the week, people had built in enough concession for next week's auction in Treasuries. This gives them a reason to jump back in."

Yields on benchmark 10-year Treasury notes declined by 0.11%age point to 3.60%.