The New York Stock Exchange in Manhattan. (May 1, 2012))

The New York Stock Exchange in Manhattan. (May 1, 2012)) Credit: Getty Images

Fear over European debt surged Monday and drove stocks sharply lower around the world. The Dow Jones industrial average plunged almost more than 200 points before recovering during morning trading.

Investors were reacting to a sharp increase in borrowing costs for Spain and Italy, a signal of renewed worries that the Spanish government will need an international bailout.

Spain's market regulator said it was temporarily banning short-selling of shares on its stock indexes. In a short sale, an investor seeks a profit by betting that the price of a certain stock will fall.

Strong selling rattled European markets. The main stock index dropped more than 7 percent in Greece, 3 percent in Spain and Germany and 2 percent in France and Britain. Asian stocks were also sharply lower.

Just before noon on Wall Street, the Dow was down 146.1 points to 12,676.5. Just after the opening it fell 225 points. The Dow has had only four declines of 200 points this year, including its worst, a 274-point drop on June 1. The Standard & Poor's 500 index was down 17.8 points to 1,344.9, and the Nasdaq composite index was off 50.9 points at 2,874.5.

The price of crude oil dropped more than $3.50 per barrel to below $90, and yields for U.S. government bonds sank to record lows, a sign that traders were seeking the safety of American debt. The euro hit a two-year low against the U.S. dollar.

Bank stocks, which tend to take a hit when fear flares in Europe, were among the biggest losers. Citigroup stock dropped more than 2 percent and Bank of America 1.6 percent.

The euro slipped just below $1.21 against the dollar, its lowest reading since June 2010.

There were also signs that a global economic slowdown is hitting U.S. companies that rode out the recession fairly well, largely because currencies overseas have tumbled against the dollar.

While global sales at McDonald's restaurants open at least a year rose 3.7 percent, profits slid by about the same rates due to currency exchange.

Stock in the world's largest hamburger chain slid 2 percent in premarket trading after falling short of most Wall Street expectations for both net income and revenue.

A forecast from a Chinese central bank adviser that China's economy could grow at a slower pace in the third quarter deepened concerns about the global slowdown.

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