NEW YORK — Not even a strong string of earnings reports could stave off worries about debt on Monday.
Europe's banking troubles and an impasse over lifting the U.S. government's borrowing limit helped drag down stock markets in the U.S. and Europe. The worries also sent gold prices to a record high before accounting for inflation.
The S&P 500 index dropped 11 points, 0.8 percent, to 1,305 in afternoon trading. The index had been down as much as 1.5 percent earlier. The Dow Jones industrial average fell 96 points, also 0.8 percent, to 12,383.
The Nasdaq composite fell 32 points, or 1.2 percent, to 2,758. French and German stock markets closed down more than 1.6 percent.
The results of stress tests on European banks released Friday failed to reassure investors about Europe's debt crisis. Eight banks failed the test to measure how well they would hold up under additional financial strain.
However the tests didn't take into account how banks would fare if Greece or Italy defaults, says Dan Greenhaus, chief global strategist at BTIG. Greece and Italy are among the countries most at risk of defaulting on their debts.
Italy not only has Europe's third largest economy, but also the world's third-largest bond market at 1.8 trillion euro ($2.5 trillion). "So far European officials have failed to stabilize a country as small as Greece," Greenhaus said. "So we have little reason to have faith they'll fix a country as big as Italy."
In the U.S., the debt limit debate remains at a standstill in Washington. The Treasury Department says the limit must be raised by Aug. 2 or the government risks defaulting on its debt.
But a deal needs to be reached soon, possibly as early as Friday, to have legislation ready for President Barack Obama to sign by the deadline. Rating agencies warned last week that the impasse puts the country's top AAA credit rating grade at risk.
The continued delay in reaching a deal is beginning to weigh on markets, investors say.
U.S. bank stocks fell sharply. Bank of America slid 2.6 percent, to $9.74. The bank recently announced an $8.5 billion settlement with a group of mortgage bond investors and reports earnings Tuesday. It's the only major bank trading in the single digits.
Gold rose for the tenth day in a row, jumping 0.8 percent to $1,602.40 an ounce. Its price has been rising steadily since the start of the month as the countries considered at risk of default expanded beyond Greece to include Italy and the U.S. Traders have been buying gold as an alternative to holding dollars and euros as the debt problems in the U.S. and Europe undermine confidence in both currencies.
Adding to the worries for investors: another downgrade on the U.S. economy. Economists at Goldman Sachs lowered their estimates for U.S. economic growth in the second and third quarters of the year late Friday. The economists cited weak sales growth and a drop in consumer confidence in cutting their forecast for second-quarter growth to 1.5 percent from 2 percent. Goldman lowered its third quarter estimate to 2.5 percent from 3.25 percent.
Monday's stock-market sell-off pulled down companies in every industry, led by banks. Even those reporting strong profits slid lower.
Halliburton Co. was down more than 1 percent in afternoon trading after posting record revenue in the second quarter. The oil-field service company trounced Wall Street's earnings estimates as higher oil prices led to more drilling, increasing demand for Halliburton's services.
News Corp. fell 4 percent as the troubles deepened for Rupert Murdoch's media conglomerate. Rebekah Brooks, the former head of the company's British newspaper business, was arrested over the weekend in connection with a widening phone-hacking scandal. News Corp. has abandoned its bid to assume full control of the highly lucrative satellite TV company British Sky Broadcasting because of the scandal. News Corp.'s shares are down 15 percent this month.
Hasbro Inc. fell 4 percent. Stronger sales of Transformers action figures and other products lifted the toy maker's earnings but not enough to beat Wall Street's estimates.
Profits at newspaper publisher Gannett Co. Inc. fell 22 percent but it still beat analysts' estimates by a penny. Gannett said it would start buying back stock and double its quarterly dividend to 8 cents. Gannett's stock dropped more than 7 percent.
It's the start of a crowded week of earnings reports. More than 100 of the companies that make up the S&P 500 index are set to release second-quarter results. The list includes the major banks, Apple Inc., Johnson & Johnson and General Electric Co. IBM Corp. reports after the close of trading Monday.