Debt worries drag down stock market

Not even a string of better 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 United States and Europe. Gold topped $1,600 an ounce as investors sought safe places to park money.

The Standard & Poor's 500 index dropped 10.70 points, or 0.81 percent, to close at 1,305.44. The Dow Jones industrial average and Nasdaq composite index gave up their gains for the month. The Dow fell 94.57 points, 0.76 percent, to 12,385.16. The Nasdaq fell 24.69 points, or 0.89 percent, to 2,765.11.

The results of stress tests on European banks released last week came under deeper scrutiny. Eight banks failed the test aimed at measuring how well they would hold up under additional financial strain.

But the tests didn't take into account how banks would fare if Greece or Italy defaults, says Dan Greenhaus, chief global strategist at BTIG.

Italy has not only 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 Washington the U.S. debt limit debate remains at a standstill. The Treasury 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 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 triple-A credit rating grade at risk.

House Republicans are preparing to vote Tuesday on a plan that would lift the debt ceiling but also slash spending. The proposal includes a balanced-budget amendment to the U.S. Constitution. Obama pledged to veto the bill.

The latest delay in reaching a deal is beginning to weigh on markets. U.S. banks stocks, which would get hit hard in the event of a default, fell sharply. Bank of America slid 2.8 percent, to $9.72, the biggest drop for the 30 stocks in the Dow average. The bank recently announced an $8.5-billion settlement with a group of mortgage bond investors, and it reports earnings on Tuesday. It's the only major bank trading in the single digits.